Why People Planning Matters
Estate planning is about protecting assets over time for the good of beneficiaries. Many grantors and advisors work hard on the first part, protecting assets, but fail to adequately address the second part, creating a positive impact for beneficiaries. Many grantors intend for their trusts to become a gift of love that enhance the lives of beneficiaries, but create trusts that burden or even negatively impact beneficiaries’ lives. These trusts have protected assets over time but have failed to empower beneficiaries. These estate plans need to emphasize “people planning”–i.e. plan for the unique individuals impacted by the estate plan and prepare these individuals for the estate plan–so that the trust empowers beneficiaries to live flourishing lives.
A frequent saying in our firm is that “if it can be written down and isn’t against public policy, we can include it in the trust.” There are ways in which attorneys and clients can collaborate to tailor trust language and empower impacted family members to flourish. We call these strategies “People planning.” People planning consists of crafting the language of an estate plan to prepare for contingences involving family members and family dynamics.
By incorporating people planning into standard estate planning tools, attorneys can add value for the families they serve. Revocable Living Trusts (RLTs) are the foundation of most estate plans. Their benefits include probate avoidance and planning for incapacity. These benefits are a given for any estate plan. To add value to an estate plan, an attorney will take a close look at the family’s unique situation and incorporate these dynamics into the plan. This article covers two important considerations: planning for blended families and preparing beneficiaries for inherited assets.
Blended Families
Blended families pose a challenge for estate planning because both spouses are often bringing children from prior marriages. Almost certainly one of the spouses will outlive the other. At this point, the surviving spouse could change the estate plan in a way that disadvantages the deceased spouse’s children. If the surviving spouse is disabled, the successor trustee could make these changes as well.
(N.B. Revocable Living Trusts are freely revocable and amendable at any time. This could result in the surviving spouse changing the terms of a trust in contravention of the deceased spouse wishes.)
These conversations may be uncomfortable for families because they bring up issues involving death and inequitable treatment of children. However, they are far more common outcomes than many couples may expect. Attorneys should sensitively have these conversations early on in order to draft trust language around these contingencies.
After exploring these potential outcomes with clients, attorneys may use drafting techniques that seek to carry out our clients wishes. For example, clauses can be included that ensure that the surviving spouse is provided for and limit the surviving spouse’s ability to amend the trust. This ensures that the deceased spouse’s wishes are honored and that the spirit of the trust functions as it did when it was created.
People Planning: Distributions
How will beneficiaries inherit money? This is another area for “people planning” within the estate plan. Outright inheritance does not usually enhance the lives of beneficiaries. The beneficiary may not be ready to control a significant amount of money. A sudden, large distribution of wealth may misalign incentives and values. This can result in unsustainable or unproductive lifestyles.
The first task is for attorneys and families to discuss where all the impacted family members are currently at. Are they on a good career track? Do they value education? Do they currently (or have they in the past) struggled with substance abuse? After this conversation, clients can spend some time discussing goals with clients to determine what flourishing might look like for each family member impacted by the estate plan.
After this conversation the attorney can draft an estate plan to address these potential outcomes with specific trust provisions. For example, a trust might include language that creates trusts for the grantors’ descendants, rather than an outright distribution, following the death of both grantors. The distribution standards for these trusts can be limited to health, education, maintenance, and support which can be used for paying for education, buying a home, or starting a business. As time passes and the beneficiary gains the skills necessary to handle their inheritance, the trust can either gift to the beneficiary outright or become a beneficiary-controlled trust, where the beneficiary manages the trust assets for their own benefit without limitation. Alternatively, grantors may be entirely unsure of the beneficiaries’ ability to manage assets responsibly. In this case, they can set up separate trusts for each beneficiary that distribute a salary match.
Discretionary Distributions
Grantors may also want to leverage the power of distribution in order to prevent beneficiaries from using family assets to fund a chemical dependency or other addiction. In such a case, the trust could include a standard that determines whether a beneficiary has a substance abuse problem. If triggered, this clause would give the trustee broad discretion in preventing distributions and/or paying for treatment until there is evidence of recovery. These safeguards protect beneficiaries from adverse consequences that result from inheriting assets while overcoming an addiction.
A complete discussion of substance abuse planning is outside the scope of this article. However, this example shows how important people planning is in an estate plan. Provisions like these treat affected family members as individuals and allow the trust to distribute assets in a way that leads to flourishing lives.
Preparing Beneficiaries
State Your Intent
Even a well-drafted trust with appropriate distribution provisions may be a source of resentment or confusion to beneficiaries if they do not understand the purpose of the trust. While many grantors assume that their intentions are and will remain obvious, this may not be the case, especially if decades transpire from the creation of the trust to the commencement of distributions to beneficiaries. Thus it may be a good idea for grantors to explain the intention of their gift in the precatory language of the trust and why they made the decisions they did.
Educate Beneficiaries
Trustees can act as mentors for beneficiaries, but they cannot take the place of parents and family members. In order for a trust to enhance the lives of beneficiaries and contribute to their flourishing, beneficiaries need to be prepared for whatever wealth they will receive from the trust.
First, grantors can proactively communicate with beneficiaries as to what sort of wealth that they will receive, when they will receive it, and why the trust is set up in the way it is.
Second, grantors can invest in forming the good character of beneficiaries. Obviously no parent can ensure the character of their children, and young people inevitably make mistakes (and hopefully learn from them). However, a good example and simple instruction can make a huge difference in instilling a work ethic and sense of responsibility. In this article, Eileen Gallo, PhD. and Jon Gallo, J.D. have some excellent ideas.
Third, beneficiaries need solid financial literacy to be able to responsibly manage and enjoy the wealth that they inherit. James Grubman, for example recommends the following eight areas as a foundation:
1. The ability to live within one’s means, i.e., managing spending consistent with one’s level of income;
2. The ability to manage spending relative to income in a manner that would be consistent with being able to save a portion of income, as needed;
3. The ability to understand and manage credit and debt processes, leading to avoidance of excessive debt;
4. The ability to maintain reasonable accounting of one’s financial resources;
5. The ability to understand and manage one’s personal assets, either using basic investment procedures and principles oneself or to delegate these actions responsibly to appropriate advisors; and
6. The ability to generate income for spending needs if additional resources are required or desired beyond trust distributions.
In addition, the following two skills are advisable though not crucial:
7. The ability to use of a portion of one’s income and/or financial resources to support charitable activities of one’s choosing; and
8. The ability to show initiative, engage in entrepreneurship, and demonstrate purpose in paid or unpaid work.
Conclusion
Estate planning using revocable living trusts is about much more than probate avoidance and planning for incapacity. The true power of an RLT based estate plan is derived from its ability to navigate family dynamics to create the best outcome for everyone. Ideally an estate plan does two things. It protects the original will of the grantors and allows for inheritors and beneficiaries to grow into their inheritance. If an estate plan does these two things well, families are better able to achieve their goal of flourishing.