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In creating trusts to protect loved ones, people often overlook the need to protect the person in charge of the assets — the trustee. It is possible, and in some cases probable, that conflicts will arise between the trustee and the beneficiary of the trust. If such conflicts arise, the trustee under fire is not always a sophisticated bank or trust company. Sometimes, it can be your spouse, child, or close friend. It is thus important that a trust include provisions to protect the trustee from disgruntled beneficiaries. THE CONFLICTS OF LIFE These conflicts can arise easily in common estate plans. A typical estate plan often includes a marital trust solely for the benefit of the surviving spouse. It also often includes a credit-shelter trust, which is intended to benefit the spouse (and possibly children and grandchildren) during the spouse’s life and to pass assets tax-free to children and more remote descendants after the surviving spouse’s death. Simple, right? Unfortunately, if your spouse is serving as trustee, his or her job may be complicated by children or stepchildren. For example, while your spouse may serve as trustee of a credit-shelter trust intended to benefit both spouse and children, your primary goal for the trust may have been to provide for your spouse, often to the exclusion of your children. Why? The answer may be twofold: (1) The size of your estate may be sufficient to support your spouse into old age, but may not be much more than that, and (2) your spouse may be concerned that he or she will need money for a medical emergency or that he or she will live to be 120. Many of us want to provide for our spouses during their lives, with leaving something for our children as an added bonus. Still simple, right? Now consider the adult children. Some may be the children of the surviving spouse, and some may not. Let’s say, for example, upon his father’s death, a child thinks: There should be something for me. There should be something for my kids. What if Mom (or Stepmom) spends it all? What if she squanders it, lives life lavishly, remarries . . . ? I need to keep a close eye on Mom’s management of my future inheritance. After all, Mom does not know how to handle money — that was Dad’s job. Dad made the money, managed the money, and now Dad would want me to make sure Mom does not waste it. Sound plausible? What about Mom — what is she thinking? Now that he is gone, how will I survive? I need to make sure I have enough to live on for the rest of my life. I need housing, food, health care . . . how do I know if I have enough? What do I do to make sure I have enough? When Mom and child start to interact, especially with respect to the money Dad left behind, conflicts can arise quickly. Mom considers purchasing a vacation home with one of the trusts and wonders, Why not? My husband and I always wanted one, and the real estate market is thriving. Surely this will be an investment that benefits me during my life and my children after I am gone. The real estate will appreciate, and my kids will ultimately benefit. Her child, however, has a different opinion. “Is she nuts? The real estate market is about to collapse. Now, Mom will have to spend money — my inheritance — maintaining the vacation property, and to what end? When I finally try to sell the property after she is gone, I will have nothing left.” Combine these concerns with blended and extended families, sibling rivalries, and the complexities of human nature, and estate planning may seem overwhelming. DISCRETION In this potentially overwhelming situation, you should remember to thank your trustee and, more important, to protect your trustee. In doing so, you need to decide what options to give your trustee regarding discretionary distributions. For example, if the trust is for the benefit of all your children, can distributions be made to one child to buy a car or take horseback-riding lessons? What sort of discretion should you give your trustee for investment decisions? Can your trustee invest in hedge funds or real estate, or do you want the investments to be conservative only? What protection will you provide the trustee against beneficiary suits? For example, if your son sues the trustee because the trustee gave your daughter money to buy a house, how will the trustee be protected? To provide flexibility, you might grant your chosen trustee wide latitude in deciding how and when to make distributions. When the trustee is also a beneficiary, however, some inherent conflicts may arise. For instance, if a trustee is the income beneficiary, the remainder beneficiaries may question the distributions a trustee makes to himself or herself. One way to draft the trust to prevent beneficiaries from making frivolous challenges in this situation is to specifically describe some subset of permissible distributions. At the very least, this will aid your trustee in defending such distributions and perhaps dissuade beneficiaries from challenging them. For example, if you intend for your surviving spouse to have wide latitude over distributions during his or her life, you may provide the trustee with the discretion to make distributions to your spouse for purchasing real estate, taking the vacation he or she always dreamed of, and living life in the style to which he or she has become accustomed. You may also want to provide that your spouse is the primary beneficiary during his or her lifetime and, if this is accurate, that you are not concerned if nothing is left for your children after your spouse’s death. You may also consider appointing a co-trustee. The advantage is that the third-party co-trustee’s decisions will appear more impartial than those of your surviving spouse. This may help prevent a lawsuit against your trustee, particularly in a blended family, even if, as a practical matter, the co-trustee honors your spouse’s wishes in making distributions. Some clients appoint a co-trustee to serve with a surviving spouse under certain circumstances, such as after the spouse reaches a certain age or remarries. PRUDENT INVESTMENTS A trustee is also responsible for investing the trust assets. In making investment decisions, the trustee must simultaneously consider the needs of the income beneficiary and the needs of the remainder beneficiary. In many cases the trustee may be the only income beneficiary (and the parent or stepparent of the remainder beneficiaries). Investments that favor the income beneficiary may harm the remainder beneficiaries. On the other hand, investments more favorable to the remainder beneficiaries may deprive the income beneficiary of necessary income. One solution to protect your trustee is to hire an investment adviser for the trust. With properly communicated investment goals, which may be discussed among income and remainder beneficiaries, the investment professional may be better equipped to satisfy all beneficiaries. PROTECTIVE TOOLS Many people believe conflicts among family members only happen in other families, but you would be surprised at the frequency of such tensions. Make sure your trust documents provide the trustee with weapons to combat what could turn out to be greedy, intrusive, or controlling beneficiaries. If, for example, you have a blended family, it may help to provide the trustee with the following tools: • Limited power of appointment. A surviving spouse is often granted a limited testamentary power of appointment over trust property remaining at the time of the spouse’s death. This allows the surviving spouse to determine by will to whom, among a group of beneficiaries, the remaining trust property will pass. This means that you may predetermine the group to whom your spouse may appoint this property. For example, a power of appointment may permit a surviving spouse to appoint remaining trust property among your surviving children. This group may include the children (and their descendants) from a prior marriage, the children (and their descendants) from a spouse’s prior marriage, and the children (and their descendants) from your marriage together. Significantly, including these potential beneficiaries as permissible distributees means that the surviving spouse may omit certain beneficiaries from receiving any property. The surviving spouse can use this power in negotiations with greedy or intrusive children or stepchildren. For example, if a surviving spouse serving as trustee feels that the remainder beneficiaries are not “behaving” because they are questioning his or her decisions about distributions or investments, the surviving spouse can threaten to exclude the children causing trouble from the inheritance. If you are uncomfortable with this scenario, you can still draft such a power of appointment but limit its scope. For example, you can draft a trust that gives your spouse a limited power of appointment over only a portion of the remaining trust property. Or you can require that no less than a specified percentage of the remaining trust property be distributed equally among your children. The effectiveness of this type of power of appointment depends on the circumstances. For example, consider Joe Smith, who was a surviving spouse and sole trustee of a credit-shelter trust. Joe was well past retirement age and lost his wife, Mary, after the two had raised five children. The children were all adults upon Mary’s death. Mary was familiar with the strained relationships between Joe and their adult children, and she knew that the assets Joe would have at his disposal after her death would provide a comfortable, but not lavish, lifestyle. Mary thus drafted her trust to make Joe the sole income beneficiary of the trust. Only upon Joe’s death would the children benefit from the trust. So far, so good, as Joe was well provided for. But the adult children, who did not have great relationships with Joe and who felt entitled to some of Mary’s money, asked for distributions from the trust. They also demanded accountings and copies of the trust. Remember, the adult children were not income beneficiaries, only remainder beneficiaries. In this case, Mary provided Joe with a limited testamentary power of appointment among the children and grandchildren, which included the power to omit one or more descendants. After repeated demands from two of his children for information about Mary’s trust, Joe drafted a will exercising the power of appointment in effect to remove the two children as remainder beneficiaries of the trust. Despite this action, the two children brought a judicial action demanding a copy of the trust and annual accountings. Joe felt harassed and bullied by his two children, but he did not yield. Joe ultimately prevailed in court, as he was not required to provide a copy of the entire trust or accountings to his children. • “No contest” provision. Another mechanism you can use to attempt to force good behavior between your beneficiaries and your trustee is a “no contest” provision. If you suspect the beneficiaries may cause trouble for the trustee, you can include a provision that penalizes a beneficiary who complains about the trustee’s actions or about the provisions regarding a beneficiary’s rights under the trust. It can be drafted to reduce or eliminate a beneficiary’s interest in the trust if he or she complains. This kind of provision may be used if you expect one or more beneficiaries to object strongly to a trust’s provisions (such as a child being cut out of a trust completely or receiving a lesser share). This is also useful if there is reason to believe a beneficiary may assert that the trustee is being unduly influenced or lacks the capacity to make decisions. • Indemnification. To further protect your trustee, the trust instrument should indemnify the trustee’s actions to the extent possible. Your trustee is generally liable only for willful misconduct or gross negligence. • Opt-outs. If contentious beneficiaries are expected, you, if permitted under state law, may wish to opt out of some default provisions of state law. For example, you may permit your trustee to file accountings that consist solely of the trust income-tax return. You may also wish to opt out of any default notice requirements that may force your trustee to provide a copy of the trust to any potential beneficiary — not just current income beneficiaries. There are many ways to draft a trust to protect your trustee from inquisitive and intrusive beneficiaries. To protect your chosen trustee and beneficiaries, you need to carefully balance the needs of both. Your chosen trustee has agreed to protect your family’s investments, and you need to protect your trustee.
Deborah D. Cochran is a founding partner of Vienna, Va.’s Cochran & Owen. Christopher F. Tate is an associate with the firm. They specialize in estate planning.

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