"Psychological" Estate Planning

Seven Stories of Fending Off Family Foul-Ups

Do you want your Estate and Trust Lawyer to be a Counsellor or only a “Tax Technician?”

Eavesdrop on a conversation among estate and trust lawyers. What do you hear? “How do we plan for “portability” of the estate tax exemption?” What’s your experience been with valuation discounts for partial interests in real property? For many lawyers, it’s almost always about TAX. What do clients want? They want us to be counselors in the true sense of the word. They want to walk out of our offices with the secure feeling that they are transmitting not their just assets, but also their values, to their children and other family members.

Many estate and trust lawyers don’t become involved in the “psychological” aspects of estate planning. Perhaps they feel uncomfortable. Possibly, they believe that it’s not part of their job or that clients want only tax and business advice. It’s not only part of our job. It’s possibly the most important aspect of our job.

I don’t know too many clients whose first words to me were “I want to eliminate all of my taxes.” More often, I hear stories of family dysfunctionality, difficulties in creating a workable business succession plan or how to keep children from becoming “trust fund babies.” After we understand a client’s emotional issues we can devise a plan to deal with those issues in a tax efficient way. At Trustlawyer, LLC, we have many years of experience dealing with difficulties created by substance abuse, “outlaw in-laws” and children who don’t necessarily share their parents’ values of work and thrift.

Trusts have been a feature of the English legal system since the 16th century – way before there was an estate tax. They were originally designed to separate the benefit of assets from the control of assets. As one of my colleagues says, they protect against “creditors, predators, inability and disability.” Here are some examples of “psychological estate planning”:

First Story: The “Work Incentive Trust”

Background: When I asked Linda what she wanted me to do for her, she answered: “I don’t want my grandchildren to become “trust fund babies.” This hard working woman, who had helped build a family business, was appalled at the values of what’s become the “entitlement generation.” Linda also believed that her grandchildren would appreciate their educations more if they paid for some of the costs.

What we did:

• If a grandchild is over 18 and is neither a full time student nor in the military, the trustee has to consider whether he or she was “suitably employed” before making distributions.
• “Suitable” employment isn’t just having a job. Our trust documents provide that the trustee has to consider whether the job is reasonable for the beneficiary, considering his or her age, health, education, other responsibilities, as well as the state of the job market. An example that I often use with clients is to consider two beneficiaries who request a distribution for home improvement. They each earn $70,000. One is a policeman. The other is a physician who works two days a week at a walk in clinic. One is suitably employed. The other is not.
• Linda believed that a child appreciates education if he or she has to work for it. We provided that the trustee may pay up to 75% of a grandchild’s educational expenses provided that he or she earns the balance through part time work.
• Our trusts have no mandatory “age” distributions. I was once forced to tell a trustee that he was required to make a distribution to a beneficiary who was involved with a cult which, we all knew, would be the actual recipient of the assets. The document said “when he reaches age thirty, distribute the assets to him.” That would not have happened with one of our Work Incentive Trusts. The trustee would have had the discretion to defer distributions which would not be used in the beneficiary’s best interests. We give the trustees several examples of when they consider postponing a distribution.

Second Story: The “Tough Love Drug Trust”

Background: Mr. and Mrs. Walker have a twenty year old son, Hiram, who is has been involved with drugs and alcohol since high school. He doesn’t seem to care about his future. His parents do. They want to make sure that their resources are used to help him to become a useful, productive citizen. They do not want the trust to be a crutch.

What we did:

• The trustees are Hiram’s aunts and uncles, who know him well.
• If the trustees become aware of, or reasonably suspect, that Hiram has a substance abuse problem, they can require him to take a drug test at any time. If a test is negative, the trust continues as a Work Incentive Trust. The trustees could distribute assets to him for his education and support and, in addition, could help him to purchase a house and invest in a business.
• If he were to fail the first drug test, he would be eligible to have the Trust pay for a rehabilitation program. If he successfully completes the program and does not fail a subsequent test, he can receive benefits from the Trust as if he had never had a substance abuse problem. If he were to fail two drug tests, the trust becomes much “tighter.” The trustees’ discretions would be limited to providing for necessities.

Third Story: “He’s Married to Whom ? !”

Background: Bob and Carol have significant concerns about their daughter-in-law, Alice, whom they believe to be mentally and emotionally unstable. They would have no problems leaving assets to their son, Ted, if he were not married to Alice. We needed to craft a provision which would shield the assets from Alice and, at the same time, allow the trustee to give them to Ted if he and Alice separated. We could not just provide that, if Ted and Alice were divorced, the assets would go to Ted. That type of provision is unenforceable because in “encourages divorce.”

What we did:

• The trustees of Ted’s trust (his sisters) may distribute assets “for his best interests.” They are NOT required to take his other resources into account. This is not a Work Incentive Trust.
• If Ted, or anyone acting for him, attempts to have the trustees make any distribution, the trust will immediately terminate. The assets will be distributed to Ted’s nieces and nephews.
• The trustees may terminate the trust at any time and distribute all of the assets to Ted. The unstated premise is that, if Ted is no longer married to Alice and does not have any obligations to her, he would receive the assets.

Fourth Story: The “Convertible” Special Needs Trust

Background: Our clients’ adult son, Ellsworth, has a neuromuscular disease which, so far, hasn’t prevented him from enjoying a fairly normal life. He might need a Special Needs Trust in the future in order to maximize his available resources, such as Medicaid. However, Special Needs Trusts are very restrictive. Ellsworth should not be required to live with one just because he may need it in the future.

What we did:

• Since Ellsworth doesn’t need the protection of a trust now, we created a very liberal trust for him. The Trustee may distribute assets to him for almost any purpose. 
• If Ellsworth becomes disabled, the trust is transformed into a Special Needs Trust.
• Among the events that would trigger the conversion are Ellsworth’s receiving disability benefits from Social Security or the trustees’ determining that he has become permanently disabled due to his condition.

Fifth Story: The Trust is Too Big!

Background: Joe’s and Josephine’s hard work paid off. They sold their business for $18 Million. After capital gains and estate taxes, their sons, Tim and Jim would each inherit approximately $6.3 Million. Tim would invest his share in his own business. Jim, although, he’s a decent man and works hard now, would probably “retire” at age 40. Joe and Josephine want to make sure that Jim will always have a home and that he continue to support himself by suitable employment.

What we did:

• We first allocated Joe’s and Josephine’s house to Jim’s share. We then provided that the trustee set aside a portion of the trust assets to provide for all of the expenses of the house for Jim’s reasonably anticipated lifetime.
• The remaining assets are in a Work Incentive Trust until Jim is sixty years old. The trustee may distribute assets to him for his support, medical and dental care. After Jim reaches age sixty, the trust becomes much more liberal. The trustee may make distributions to him for his “general welfare,” including vacations and luxuries, without having to consider his other resources.

Sixth Story: Avoiding Sibling Rivalries. Give it to ‘em now.

Backgound: Mr. Lishnis had been the sole proprietor of a business with three semi-integrated divisions. Each division had been managed by one of his sons, Bill, Jim and Tim, but Mr. Lishnis remained in control. Although this arrangement had always worked reasonably well, Mr. Lishnis’ health had declined and inter-sibling issues emerged. Bill believed that some of the profits of “his” division were being used to inject capital into the division run by Jim. Jim felt that the divisions should be run “one for all and all for one,” as they were when his father was healthy. Tim was not sure whether he wanted to continue running a business at all. Mrs. Lishnis had never taken a business management role. Her primary desire was that, when she and Mr. Lishnis were gone, her sons and grandchildren would get along as a family.

Mr. Lishnis’ will gave each of his sons the option to have “his”division allocated as part of his inheritance. If we did nothing, there would have been some very difficult issues when Mr. Lishnis died, including what assets “belong” to each division, what the values were and whether his sons still wanted them.

What we did:

• We decided to use a large portion of Mr. and Mrs. Lishnis’ gift tax exemptions to give each of their sons the assets which he would eventually inherit.
• I met with each son separately and asked him to come prepared to discuss what assets he actually wanted. One of the most difficult issues was trying to separate Bill’s and Jim’s divisions which were, in a sense “Siamese twins.” After many meetings, and with the help of the family’s CPA, we were able to devise a workable plan.
• Mr. and Mrs. Lishnis retained sufficient assets to take care of themselves for their entire lifetimes.
• We obtained fair market values of all of the assets so that each son’s share would be equal. Each of Bill and Jim received the assets of his division together with the building in which it was located. Tim got sufficient liquid assets to allow him to retire from work and devote his time to other interests.
• The sibling issues, which mainly revolved around control of the businesses, should hopefully diminish. The administration of Mr. and Mrs. Lishnis’ estates will be much simpler and less expensive. This was a win-win situation for the family.

Seventh Story: “First Crop” and “Second Crop”

Background: Enoch and Eve Arden have two children, ages two and four. Enoch’s two daughters from his first marriage are in their twenties and have completed their educations. Enoch said that he wanted to treat all of his children “equally.” Although people use the word “equally,” they often mean “fairness.” In many situations, equality may not be equity.

What we did:

• Parents provide for their children on an “as needed,” rather than equal, basis. Enoch wanted to take care of his younger children, but didn’t necessarily want to do more for them than he had for his daughters.
• We created a Work Incentive Trust for the younger children’s support and education. Funds would first be allocated to the trust based on the estimated the cost of their educations, considering inflation and the times when the funds would be needed.
• We then allocated a sufficient amount to the trust to pay for their support at the same level that Enoch had provided for his daughters.
• The trust would continue until both younger children reached age twenty five or completed their bachelor’s degrees. At that time, the assets would be divided among all of Enoch’s children.

Conclusion:

Clients are not like cheap baseball hats. One size does not fit all. In many cases, tax planning should not be our initial focus. Our more than thirty five years of experience with diverse, and often difficult, situations give us the perspective to craft unique estate plans for unique people. We look forward to working with you and your clients.