The practice of trusts and estates law typically entails three sets of complexities. The complexity of the law and of the financial situation of the client are well known to most business attorneys. Estates and trusts, however, add a third level of complexity: the family situation of the client. In fact, in many estate-planning situations, the emotional nuances of the family environment and the client’s wishes pose more difficult challenges than the law or the structure of the client’s business ventures and finances.
Clients will naturally assume that their individual situation is unique, and, to a certain degree, they are right when it comes to the details. Beneath those details, however, are certain similarities in broad goals that many clients will share. Estates and trusts attorneys have therefore been able to develop a number of fairly standard and inexpensive solutions to these customary challenges. This article takes a look at a few of the more common challenges that parents face when making their estate plans.
Two emotions can predominate when parents discuss plans for distribution of their estates after they are deceased. While not the only emotions in play, two emotions assume an important role in most estate-planning decisions regardless of the age of the testators or their children or other heirs, or the value or type of the assets that the estate comprises: (1) the desire to be “fair”; and (2) a fear of seeing assets “wasted.”
The common thread in these emotions is that both act against the natural tendency to divide an estate, or the part of the estate allocated to nonspouses, equally among all heirs. The clients will often fear making their children angry, but they still understand that in parenting matters, fairness and an equal split are not always synonymous.
Successful parents know that treating children equally is often not a matter of giving them all the same things or supporting their aspirations with the same exact funding. One may have the talent to play in national chess tournaments, while another prefers to play intramural sports that keep him close to home. The summer trek across Europe on a bicycle that one teen yearns to complete might cost more than the outdoor camp another craves to attend. It would be foolish to set the same college savings goals for a daughter who always tests into gifted programs and won the science fair and a son who gets average grades with no interest in extracurricular activities. A child with any degree of mental challenges may require more educational and other types of support than one without behavioral disabilities.
In short, parents learn to equate fairness with filling needs rather than dividing chips. Estate planning requires the same approach, even for those whose estates fall below the taxable minimum. Even though it may seem much easier just to split things equally to avoid being seen as unfair, an even split may not be the way to act in the best interests of the children and other heirs.
Especially when children are younger, it’s almost impossible to predict what the individual needs of each child could be. It clearly isn’t fair to earmark the same amount of money in a will to support the education and other needs of each child or grandchild.
The way out of this dilemma is to create a pot trust. Rather than establish a separate trust for each minor child, the parent or parents create one common pot from which an independent trustee draws to cover all the stipulated expenses of the children up to a certain age, including but not limited to living, educational, health care, enrichment and travel expenses. The trustee is not required to spend the same amount on each child and, therefore, may spend more on the child who is going to law school or needs special medical assistance. Once the youngest child is of an age stipulated in the trust, the remainder of the pot trust is divided, usually equally among all the beneficiaries it covers.
Another advantage of a pot trust is that the property placed in trust does not have to be divided. A separate trust for each child might require the trustee to sell a business, investment accounts or real estate, which might not be in the best interests of the family.
The pot trust makes the most sense when children are young and fairly close in age. The older the children are, the more the costs covered by the typical pot trust will have already been incurred. The challenge when the ages of children vary widely is that the oldest child might have to wait until his or her 30s (or later) to receive his or her share of the remainder of the trust. In such a case, an attorney can advise the client to address the needs of the older children separately from those of the younger ones.
Another family challenge that clients will ask attorneys to solve in estate planning is the child or other heir who is financially irresponsible or hasn’t yet found himself or herself. Parents may fear that such a child could run through an inheritance in short order and then be left with little or nothing.
Parents interested in protecting such children from their own foolishness should consider asking their attorneys to embed a spendthrift trust into their wills. A spendthrift trust is a trust that gives an independent trustee full authority to make decisions on how the trust funds are spent for the benefit of the beneficiary. The beneficiary has to seek and obtain approval of the trustee to access the money or property in the trust. The trustee thus can act in the long-term interests of the beneficiary. Because a ne’er-do-well child may grow resentful when denied access to funds in his or her trust, most attorneys will recommend that the trustee not be a sibling to the spendthrift beneficiary.
A spendthrift trust also prevents creditors from attaching the interest of the beneficiaries in the trust before that interest is actually distributed to them. This means that the trust is not financially responsible for contracts into which the beneficiary may foolishly enter or financial judgments against the beneficiary.
The inability of creditors to gain access to the assets in a spendthrift trust makes it a beneficial vehicle for protecting the estate from a speculative business venture of the heirs, even ventures of which the testator approves. Many irrevocable trusts thus contain spendthrift provisions even when the beneficiaries have not earned reputations as profligate spenders. The spendthrift provision protects the trust and the beneficiary in the event a beneficiary is sued and a creditor attempts to collect from the beneficiary’s interest in the trust.
The mechanics of establishing a spendthrift trust are fairly simple. The establishment of the trust can be embedded into one clause of a will, as long as there is explicit language that demonstrates that the grantor intended to create a spendthrift trust for one or more beneficiaries.
For both pot and spendthrift trusts, an attorney must exercise care in discussing an appropriate trustee. Within the guidelines established in the trust, the trustee has the sole decision-making authority on whether and how the money is to be distributed during the duration of the trust, so the trustee and any secondary trustees must be both scrupulous and knowledgeable of the family dynamics. The trustee must be willing to dedicate time to understanding the objectives of the grantor and the individual needs of each of the beneficiaries. The trustee’s decisions are not automatic and can’t be automated. When the finances or the family dynamics attain a certain level of complexity, a professional such as the family or estates and trusts attorney is often the most appropriate trustee.
These few examples demonstrate the importance of engaging in a long and thorough confidential discussion with clients when they mention the need to develop or update a will. Business attorneys for small and family-owned businesses would do well to probe their clients from time to time to make sure that their estate plans are in order. For all closely held businesses, estate planning for the owners is a necessary and important part of overall business and succession planning. •
Amanda R. Gerstnecker and John W. Powell are attorneys with Pittsburgh-based Meyer, Unkovic & Scott. They often work on estate planning and business-succession issues. Gerstnecker can be reached at firstname.lastname@example.org and Powell can be reached at email@example.com.