How Can a Trust Keep My Family From An Undesirable Lifestyle?

Some people are hesitant to use trusts in their estate planning. Some have the notion that if you leave money in trust, it will make “trust fund babies” of your children or grandchildren.

You may be afraid that they’ll become spoiled brats, who do nothing but spend money they haven’t earned or invest foolishly.

FEDWeek’s recent story, “Using a Trust as an Incentive for Your Heirs” explains that trust distributions can be limited to modest amounts or left to the discretion of the trustee, who’ll manage the trust assets.

The article suggests that if you do leave money in trust, you should avoid the common practice of providing for distributions at the ages 25 and 30.

That’s because at those ages, most people are better off finishing their education and establishing their careers. Giving them a bagful of money at that age, might decrease their drive to pursue a meaningful career.

One way to do this is what’s called an “incentive” trust. This type of trust offers rewards to trust beneficiaries who accomplish specific goals.

With an incentive trust, the beneficiaries might get a particular amount of money for getting higher education degrees, attaining certain levels of earned income or volunteering at a church or in the community. For instance, your trust could be drafted by your estate planning attorney to state that the trustee will distribute to each of your grandchildren a certain percentage (such as 25%) of earnings each year, up to a certain amount. This could be tied to a requirement that you make.

Another way to go about this trust, is to leave the distributions to the discretion of the trustee. The trust might detail the types of activities that will be rewarded, then permit the trustee to make appropriate distributions.

When you’re going to depend so much on the judgment of the trustee, for this type of arrangement to work, it’s critical to choose a highly-qualified trustee.

The trustee could be a relative, friend, or professional advisor. He or she must be able to empathize with your beneficiaries but still make prudent decisions about distributions. In addition, add a plan for trustee succession, in case your first choice becomes unable or cannot serve.

Reference: FEDWeek (January 17, 2019) “Using a Trust as an Incentive for Your Heirs”

Still Wondering Why You Need to Review an Estate Plan?

One of the most common mistakes in estate planning is thinking of the estate plan, as being completed and never needing to be reviewed. That is similar to taking your car for an oil change and then simply never returning for another oil change. The years go by, your life changes and you need an estate plan review.

The question posed by the New Hampshire Union Leader in the article “It’s important to periodically review your estate plan” is not if you need to have your estate plan reviewed, but when.

Most people get their original wills and other documents from their estate planning attorney, put them into their safe deposit box or a fire-safe file drawer and forget about them. There are no laws governing when these documents should be reviewed, so whether or when to review the estate is completely up to the individual. That often leads to unintended consequences that can cause the wrong person to inherit, fracture the family and leave heirs with a large tax liability.

A better idea: review the estate plan on a regular basis. For some people with complicated lives and assets, that means once a year. For others, every three or four years works. Some reviews are triggered by changes in life, including:

  • Marriage or divorce
  • Death
  • Large changes in the size of the estate
  • A significant increase in debt
  • The death of an executor, guardian or trustee
  • Birth or adoption of children or grandchildren
  • Change in career, good or bad
  • Retirement
  • Health crisis
  • Changes in tax laws
  • Changes in relationships to beneficiaries and heirs
  • Moving to another state or purchasing property in another state
  • Receiving a sizable inheritance

What should you be thinking about, as you review your estate plan? Here are some suggestions:

Have there been any changes to your relationships with family members?

Are any family members facing challenges or does anyone have special needs?

Are there children from a previous marriage and what do their lives look like?

Are the people you named for various roles—power of attorney, executor, guardian and trustees—still the people you want making decisions and acting on your behalf?

Does your estate plan include a durable power of attorney for healthcare, a valid living will, or if you want this, a DNR (Do Not Resuscitate) order?

Has your estate plan addressed the possible need for Medicaid?

Do you know who your beneficiary designations are for your accounts and are your beneficiary designations still correct? Your beneficiaries will receive assets outside of the will and nothing you put in the will can change the distribution of those assets.

Have you aligned your assets with your estate plan? Do certain accounts pass directly to a spouse or an heir? Have you funded any trusts?

Finally, have changes in the tax laws changed your estate plan? Your estate planning attorney should look at your state, as well as federal tax liability.

Just as you can’t plant a garden once and expect it to grow and bloom forever, your estate plan needs to be reviewed, so that it can protect your interests as your life and your family’s life changes over time.

Reference: New Hampshire Union Leader (Jan. 12, 2019) “It’s important to periodically review your estate plan”

What Does a Fiduciary Do?

It sounds a little like something financial, like maybe something you do at a bank. But a fiduciary relationship is a legal relationship that includes responsibilities that can be enforced, reports the Denton Record-Chronicle in a detailed article with the edgy headline “What is the “F” word?” The article addresses this serious topic that is often glossed over.

In a fiduciary relationship, whether between a lawyer and a client, a CPA and a client or two non-professionals, one person has a duty to act only in ways that will benefit the other person or group of people. The fiduciary is required to be loyal, act in good faith, be completely honest and refrain from doing anything that would benefit the fiduciary, instead of the person they are responsible for. This is required, even if the people are not aware of being in a fiduciary relationship.

The fiduciary may not use their position, as trustee or financial advisor or executor, to “self-deal,” or take actions that benefit the fiduciary and not the other person or people. The fiduciary must also share all relevant information with the beneficiary.

So, who are these fiduciaries? They could be business partners, someone who has power of attorney for another person, trustees or estate representatives, attorneys or employees. These formal relationships are created by a relationship; in these instances, they are usually around legal agreements in the shape of partnership agreements, estate planning documents, retainers (for attorneys) and employment contracts for employees.

Some fiduciary relationships come with more responsibilities than others. Trustees and personal estate representatives, like executors, are charged with tasks in addition to general fiduciary duties. They are usually given the responsibilities of handling money, property and investments. They have a duty to properly manage those assets and report on those assets to the beneficiaries and heirs.

For attorneys, client-attorney privilege, that is, not sharing information that the client tells the attorney in confidence, is a fiduciary duty. It is also an ethical duty for the attorney.

For employees, the duty to act in an employer’s best interest may not be as limiting. Unless there is a non-compete contract, the employee may seek employment from a competitor or create a competing business, while working for the employer. However, the employee may not steal customers or other employees, before resigning from a position.

If a fiduciary does not follow through on their duties, it is called a breach of fiduciary duties. In estate planning, the executor is expected not to self-deal, and to put the interest of the estate and its beneficiaries first. The executor may charge a fee. However, the amount is determined by the laws of the state.

It should be noted that estate planning attorneys are guided by fiduciary duties and ethical responsibilities that are part of their training as attorneys. An attorney must always put their client’s interests first and keep the client fully informed, even when it’s not good news.

Reference: Denton Record-Chronicle (Jan. 16, 2019) “What is the “F” word?”