People Planning for Family Dynamics
Estate planning is about protecting assets over time for the good of beneficiaries. The last part is the most complex and also the most important. While many grantors intend for their trusts to become a gift of love that enhance the lives of beneficiaries, in reality trusts often become a burden that negatively impact beneficiaries’ lives. These trusts have protected assets over time but have failed to empower beneficiaries. These estate plans need to take family dynamics into account.
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 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.
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.
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.
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.