Estate planning is an integral part of business succession planning. I am commonly asked what are the most common problems encountered in estate planning trusts. There are so many problems with trust administration it is difficult to find a place to start or where to stop. For lack of a better plan, let’s consider what I have found to be the top five trust administration problems:
Problem: There is no way to change provisions of a trust that are outdated or ineffective. Cloths go out of style and so do trusts. Upon the death of the grantor of a revocable trust, the provisions of the trust can not be changed. Similarly, upon adoption of an irrevocable trust, the provisions can not be changed. However, the world turns, things happen, society morphs and laws change. Unfortunately, most of that last over ten years lack the versatility to be updated to adapt to changing or unanticipated circumstances. I am not talking about doing things that would make the grantor turn over in his/her grave. I am talking about just providing refinements to trust operation, taxation or payout that were not even applicable when the trust was formed. No matter how much minutia is drilled into the document, various forms of obsolescence are inevitable to long term trusts. Antidote: provide within the document a “trust amender” or “amender committee” that has the authority to amend the trust to address changing circumstances. In skip generation trusts, it is wise to also provide for succession of those who are given the power to amend the trust.
Problem: The beneficiaries do not have the power to remove the trustee. Oh Mama this can be a doozie because trust officers are not known to be the most ambitious or pro active financial servants. Consequently, if job security is no concern, their attitudes and initiative can progressively decline to the point that after realizing that jumping on their desks does not work you may want to file suit. Unfortunately this is generally not a good idea because the fine print in the trust agreement usually states that you must reimburse the trustee for the legal expenses incurred in the delivery of their services. Catch 22 gives this problem top billing. Antidote: always provide within the trust document a “trust protector” who has the power to remove the trustee.
Problem: The trust officers are given the responsibility to manage a private business or special use real estate. Banks/trust officers know fixed income instruments. Portfolio managers know stocks, bonds and the various derivatives there of. Most individuals who have not put their heart and soul in a private business do not understand it. Conclusion, banks, trust officers and capable and talented individuals do not have a clue as to how to manage a private business or special real estate. Consequently when these parties are asked to manage a business we generally see a movement to liquidation (let’s move the money into something we understand) or a steady decline in the productivity of the business. Antidote: Do everything possible to keep these special assets out of trusts. When deemed necessary, put these assets in sub trusts and designate specialists including family members or key managers who know what they are doing to manage these assets.
Problem: the trust distributes to children/beneficiaries at specified ages. As a result of this flash of cash, thirty to forty year olds indulge dependencies, make bad decisions or just go money crazy. And why not? In most cases these heirs do well having no financial education or experience that prepares them for handling significant assets. Their expertise is in patience and restrained consumption. Having controlled themselves until the trust vesting provisions were satisfied, they figured it was their time to be self indulgent. The net result is more often than not financial ruin for the irresponsible and unwarranted pressure on the responsible as they are called upon to bail out their siblings. Antidote: establish criteria for principle distributions that include history of steady employment, proof of no alcohol or drug dependencies and at least three years prior service as a co trustee to learn the fundamentals of financial management and investments. Where there is no conformity to these reasonable criteria, keep the assets under the management of a professional trustee.
Problem: The beneficiaries are surprised, shocked or dumbfounded by the terms of the trust. The parent or love one never took the time or never had the gumption to disclose how the beneficiaries were going to be treated under the trust. The reactions of the beneficiaries run the gamut from my Dad did not love me to my sibling turned my Dad against me or the attorney designed these trusts just so he could have a job and drain my parent’s estate. Irrespective of whether any of the accusations are true, being disrespected by being kept in the dark leads children to be skeptical, argumentative, litigious and even belligerent.Antidote: respect your beneficiaries by sharing how your trust is going to impact them. Listen to their reactions that beyond being self serving may give you insight into how your estate should be divided and how your trust should be administered. Don’t let your reluctance to deal up front with a problem child create problems for your other children.
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