Getting it Right in Case Things Go Wrong
by Jeffrey L. Crown
“Lawyer-ese” may not tell your trustee what you really mean.
Do you know what the language in your will means? If you have a will or trust agreement, take a look at it. Is it clear to you exactly how your assets will be administered? Does it express your individual intentions? Most legal documents are drafted in “lawyerese.” Ours are written in language that you can understand. Plain English drafting often requires more words than “lawyer-ese” but you can easily see the difference.
EXAMPLE: Lawyer language. This is a very typical trust provision for children: The trustees shall pay or apply to or for the benefit of any of such children and descendants, and to the exclusion of them, so much of the net income and principal of the trust property as the trustees in their discretion deem advisable for the health, support, maintenance and education of any such children and descendants.
Plain English drafting: My trustee may, at any time, distribute assets to one or more of my children. My trustee may refrain from making distributions. My trustee may distribute the assets that he, in his absolute discretion, believes advisable for my children’s support and educational expenses. My trustee is granted further absolute discretion to distribute assets to one or more children and may exclude others. My trustee may determine: when, how and whether to make distributions; the specific purposes for making them; and the specific assets to be distributed.
Why is it Imperative that Other People Will Know What You Mean? You are creating trusts for your children or grandchildren. You name your brother and sister as trustees. They know how you would want your assets distributed. They know your feelings about the importance of education. They understand your belief that adult children or grandchildren should be encouraged to work. They understand you.
Suppose that your brother and sister can’t serve as trustees. You have provided for, or a court will appoint, a bank as successor trustee. A very well meaning trust officer is in charge of your children’s or grandchildren’s trusts. He or she has never met you. His or her only guide to your intentions is the trust document. In a very real sense, he or she could be lost. Only you can provide directions.
As you read through the examples in this report, think about how that trust officer’s job might be made easier if, instead of common “boilerplate,” your documents actually expressed your personal intentions. Try to put yourselves in that trust officer’s shoes as he or she tries to do the best job for your children or grandchildren.
Many trust documents never define what is meant by “education.” Suppose that your child’s or grandchild’s guardian requests funds from the trust for private nursery school. Perhaps your child would like to pursue a non-academic program such as a vocational apprenticeship. How about paying for travel and expenses while studying abroad? Our documents provide clear guidance to trustees as to what is a proper educational expense.
I once represented a trustee who wanted to pay tuition for a child to attend a private, post-secondary trade school. The document provided for distributions for “college education.” Regrettably, I had to advise the trustee that he couldn’t pay for the child’s education.
EXAMPLE: Proper definition of “education.” My children’s educational expenses may include tuition, fees, tutorial expenses, books, living expenses and costs of extracurricular activities. My trustee may make distributions for study at: a private nursery, elementary or secondary school; an accredited college or university; or any other duly constituted educational institution. My children’s educational expenses may also include the expenses of any vocational apprenticeship, internship, clerkship or residency.
My trustee may make distributions to assist my children in learning or preparing to carry on a profession, trade or business. My trustee may also distribute assets for transportation reasonably connected with attending any educational institution and for reasonable expenses incident to obtaining admission to any educational institution.
I intend that this definition be liberally construed in my children’s favor. My children should receive the education that they desire and are qualified to take in order to become self-sufficient, useful, productive citizens. If it is appropriate, considering my children’s abilities and the available assets, my children should be financially enabled to pursue private studies, not necessarily at an educational institution, to develop any talent or special interest which they may have, or to engage in post-graduate studies, including obtaining a doctorate or other advanced degree, and to undertake postdoctoral studies under appropriate circumstances.
Your documents may actually encourage irresponsibility.
No one has ever said that he or she wants his or her children or grandchildren to become “trust fund babies.” They want them to become useful, productive citizens. They want them to appreciate the value of work. Almost all trust documents, including some of those drafted by prominent law firms, are seriously deficient in three respects.
1. Children are Not Encouraged to Provide for Themselves. This is a typical provision: “…in distributing income and principal to my issue, the trustee may, but need not, consider their other resources.” When should the trustee pay for a child’s support? When should he or she require the child to pay all or a portion of his or her living expenses? Most documents do not give the trustee clear guidance as to when to consider or ignore a child’s other resources. Further, the trustee is not told what the term resources includes. We address both of these points in our Work Incentive TrustsSM.
EXAMPLE: When the trustee should consider a child’s other resources.
In distributing assets to any of my children for their support and educational expenses, my trustee shall ignore the income and resources available to him or her until he or she has attained the age of eighteen years.
If a child is over eighteen years old and is neither a full time student, on active duty in the military nor a homemaker with a child or children, or if a child is over age twenty-six, then my trustee shall consider the other income and resources which my trustee knows are available to him or her from all other sources. My trustee shall conclusively determine whether any of my children is a full-time student, on active duty in the military service or a homemaker with one or more children.
Telling the trustee when to consider a child’s other resources only solves half of the problem. The trustee should be told that those “resources” include the child’s ability to earn his or her own support.
EXAMPLE: A child’s ability to work as a “resource.”
My trustee is sometimes required to take into account the income and other resources known to be available to my children. I intend that those resources include my children’s own ability to realize income from suitable employment. My trustee shall consider their training, experience, age, health and current responsibilities at the time. To be “suitably employed,” my child should be either maximizing his or her potential or doing work which, although not highly paid, serves a useful purpose. Suitable employment includes being a homemaker with a child or children. If my child is suitably employed, I suggest that my trustee distribute assets to him or her to allow him or her to enjoy a more comfortable standard of living.
2. Mandatory Distributions – A Recipe for Disaster? Virtually all trust documents provide for the distribution of children’s or grandchildren’s shares at one or more ages. Some parents give their children or grandchildren “gifts” when they graduate from college or get married.
These payouts are mandatory. The trustee has no choice but to distribute the assets, regardless of the child’s situation. Suppose that, on a distribution date, he or she is a defendant in serious litigation? What if he or she is in the middle of a divorce? Consider what would happen to the assets if he or she were misusing substances or involved in a cult? None of these are necessarily far fetched.
Virtually no “boilerplate” documents let the trustee defer distributions. A beneficiary could force the trustee to give him or her the assets.
By contrast, our Work Incentive Trusts(SM) give the trustee the discretion to defer the distribution if receiving the assets would be contrary to the child’s best interests. Clients feel more comfortable with non-mandatory distributions. The trustee can defer distributions if receiving the assets would not be in your child’s best interests.
EXAMPLE: Power to withhold distributions. My trustee may withhold any distribution of assets to a child if my trustee, in his sole and absolute discretion, determines that making the distribution would be clearly contrary to that child’s best interests. In that case, my trustee may refrain from making the distribution. My trustee may exercise this discretion if there is a valid, sufficient and demonstrable reason to do so. My trustee is authorized to determine what part or all of those assets should not be distributed. My trustee shall retain those assets in the trust until the earlier of: (1) my trustee’s concluding that the reason to retain them no longer exists or (2) the child’s death. My trustee shall then distribute the assets to the child, or to the child’s estate, respectively. Until that time, my trustee shall continue to hold those assets, and to administer and distribute them as a part of that child’s trust.
EXAMPLE: When to withhold distributions. I have granted my trustee discretion to refrain from mandatorily distributing assets to a child. I have given my trustee that discretion because it is impossible to foresee what unusual circumstances might exist in a child’s life when any distribution would otherwise be required. I intend that this discretion be exercised to assure, to the extent practical, that a child will have the personal use and benefit of the assets. I intend that a child will not suffer a detriment by receiving them. My trustee should give very careful consideration before exercising this discretion. It should be exercised only in light of a child’s best interests as they then exist. The circumstances in a child’s life which would justify exercising this discretion include: (1) involvement as a defendant in serious litigation, in bankruptcy proceedings or other severe financial difficulties; (2) involvement in severe matrimonial difficulties; (3) inability to properly administer the assets due to substance abuse or other physical, mental or emotional condition; (4) the potential loss or reduction of governmental or other benefits caused by receiving the assets; (5) affliction with an incurable physical condition that is in such an advanced stage that death is clearly imminent; (6) the high probability that fraud, duress or undue influence would cause an immediate deprivation of the assets to be distributed; and (7) the likelihood that the assets would be subject to confiscation or expropriation because of the form of government or other condition under which a child lives.
3. Encouraging Investment. Many clients want to encourage their children or grandchildren not only to work, but also to invest. Simply matching all or a portion of a child’s earned income could actually discourage the child from working. Our Work Incentive Trusts(SM) may provide that the trustee make a distribution equal to a portion of the child’s annual retirement plan contribution. Most people do not match these contributions dollar for dollar because they believe that their children or grandchildren should be investing some of their own money.
EXAMPLE: Investment matching. Theodore Cleaver gives the trustee a statement showing that he had contributed $10,000 to a retirement plan during the year. His parents’ trusts provide that the trustee match this contribution by 50%. The trustee distributes $5,000 to Theodore for his own use.
What is your greatest asset? Most people would initially answer “my house” or “my retirement plan.” Your greatest asset is your children or grandchildren. To protect them and make sure that they are provided for, you have life insurance and may have selected a guardian.
Properly planned and designed trusts are another form of protection. They help assure that your children or grandchildren will obtain the education they need and grow up to be mature, contributing members of society. Virtually no trust documents properly express parents’ intentions with any degree of specificity. They are often drafted in language that both you and the people who have to administer them can’t understand.
In all of our Work Incentive Trusts(SM), the trustee is given clear instructions when to consider your child’s or grandchild’s ability to earn his or own living before receiving distributions.
Our Work Incentive Trusts(SM) state in plain English how you want your assets distributed. You will understand them. They encourage education, work and investment. They are, in a sense, an insurance policy -- getting it right in case things go wrong.