As Yogi Berra once said, “It’s hard to make predictions, especially about the future.” Yet when you create a trust for your heirs, you have little choice but to make predictions about what their needs will be many years down the road.
Because circumstances change, it’s a good idea to make your trust flexible enough to accommodate the unexpected. If you tell your trustee what to do in too much detail, the trust might end up being useless or counter-productive if something unforeseen happens.
That’s why most trusts give trustees quite a lot of discretion. For instance, a trust might say that a trustee can make distributions to a spouse to help maintain his or her lifestyle, or to children for their health, education and support. But it’s up to the trustee to decide when and in what amounts these distributions should be made.
On the other hand, vague terms like these can sometimes be a problem. For instance, if you’re a trustee, how would you handle these dilemmas?
- A surviving spouse wants more funds from the trust to help maintain her lifestyle, but this would deplete the trust assets, and when she dies, there will be very little left for the remainder beneficiary (a child of a previous marriage).
- A college student wants you to pay his tuition bills, since they’re for “education.” But he also wants you to pay for an “enriching” trip to Europe to travel, take classes, and gain experiences related to his major
- A child quits her job because she wants to switch careers. She wants you to send her $5,000 a month as “support” until she finds a job in her new field.
- Another child gets married to someone who develops cancer and requires expensive medical care. The child wants you to pay some of the spouse’s medical bills. However, the spouse isn’t one of the named beneficiaries of the trust.
- Yet another child claims that distributions for “health” should include not only medical care, but also a gym membership, yoga classes, acupuncture, spa treatments, a hiking trip, and a three-day meditation retreat.
You can see the problem: The trustee has become a de facto parent, acting as arbiter of the beneficiaries’ needs and lifestyle choices. And the trustee must somehow do this while being “fair” to everyone and not spending so much that the trust runs out of assets.
One way to help with this situation is to give the trustee a lot of discretion in the trust document, but then write a separate “letter of intent” spelling out your hopes, dreams, goals, rules and limits regarding your family. This letter may not be legally binding, but it can be very useful to a trustee in making decisions.
For instance: If the trust will benefit one generation and then another generation, roughly how much money should be left for the second generation? Should the needs of one generation take precedence over the other? Are there circumstances where you’d make an exception – say, if someone develops an expensive illness?
If the trust will benefit several children, is it important to you that all the children ultimately receive a similar amount of the assets? Or can the trustee provide more to a child who has a greater need? And can distributions to children take into account the needs of their own family members?
Do you want your children to have relative comfort in their youth, and to take advantage of the experiences that comfort can provide? Or is it important to you that they earn their own way? And if one child is highly responsible and another is a spendthrift, is it okay for the trustee to treat them differently?
A “letter of intent” doesn’t have to be written in legalese, and you can revise it from time to time. Obviously, it can’t cover all possible issues – but it can at least give a trustee some clues as to what to do when he or she is asked to fund a new car or a backpacking trip across Italy.