Choices When Making an Estate Plan: Part Four
Written by Jim Worthington on March 10, 2019
This article concludes a four-part series on the choices you need to make to complete a comprehensive estate plan. For those who would like to read it as one document, the website includes all of this information in a white paper.
Previous articles addressed planning for disability, the choice of guardian for minor children, and the choice of personal representative. This article covers the decisions to make when setting up a trust for persons, especially minor children, who have not attained maturity. The two choices are how long the trust should last and who should be the trustee. This is a longer article because these two choices are closely interrelated and should be addressed together.
Many clients who are married and only have children from that marriage leave everything to the surviving spouse to take care of those children. That works if you completely trust your spouse. In that case, this article helps you choose alternates to serve if your spouse doesn’t survive you. However, if you have children from a previous marriage, you may or may not want the other parent to serve as trustee.
Because of my experience, I’m able to provide some insights to help you make these decisions and have included those insights in this discussion of the following decisions you will need to make.
At What Ages Should Children Receive Property Free of Trust?
If a child is left without parents, we’ve already discussed the choice of guardian, but there should also be a trust for the child’s benefit. The role of the trustee is discussed in the next section. That discussion follows this one because the choice of trustee must be considered in light of how long the trust will last. There are two common answers to this question.
The first option is to leave the money in trust for the child’s lifetime so the child has to ask the trustee for income and principal but has no absolute right to receive either. More parents are choosing this option. The main advantage of this type of trust is that the money never becomes available to a child’s creditors and can’t be divided between the child and the child’s spouse in a divorce.
The second and probably still most common answer is to give the trustee complete discretion until a child reaches an age in the 20 to 25-year-old range. This encourages the child to complete college or other school. At that age, the trustee begins mandatory distributions of income, such as dividends and interest that the trust investments earn, to the child. The trustee continues to have discretion whether to distribute the principal of the trust, meaning the investments—or the proceeds from their sale—that generate the income, to the child until an age in the 35 to 40-year-old range.
To avoid both distributing a large amount of money to a child at one time and paying for the administration of a relatively small trust, I recommend that the trust direct the trustee to distribute the principal at two different ages. Typically, the first of these ages is around 30 and the final distribution is around 40. There is no requirement that the two principal distributions be of equal size so you can front load or back load the distributions as you wish.
In sum, you will need to decide whether the trustee will have discretion to make distributions throughout your child’s lifetime. Alternatively, you may decide to require that the trustee distribute income and principal to your child. Then, you will need to decide the age for the trustee to start mandatory income distributions and the ages for the trustee to start mandatory principal distributions.
Once you have the decision made about how long the trust should last, it is time to select a trustee. You will need a trustee or a successor (back-up) trustee to serve as long as the trust is in existence.
Who Will be the Trustee?
The trustee wears two quite different hats. One is the analytical role of making wise investments or making wise choices of investment advisors. The second more subjective role is making decisions about the appropriate use of the trust’s money. For example, a child might want to pursue a culinary degree in France or Italy. The trustee would have to decide if there is enough money for that venture, whether it is a serious goal or a lark, and whether you would have wanted your money to be used for that type of education.
Depending on the ages you set for the trusts to terminate and the ages of your children, the trustee may have to fill this role for several decades. Although it is important to select a back-up person for all of the positions you choose in an estate plan, it is especially important that you have one or more back-up trustees in case the initial trustee is unable to carry out that role for such a long period of time. A bank or trust company is well-suited to serve as primary or back-up trustee because it doesn’t age, it follows internal procedures that are reviewed by state and/or federal agencies, and it will generally use an internal committee to make decisions about discretionary distributions.
Before ending this article, some general concepts will be useful.
It is usually better to name a single person to fill each of the positions in an estate plan rather than to name two or more people to the same position. In other words, I do not recommend two individuals as co-trustees. These difficult decisions are not well-suited for decision by a committee. Naming one person does not mean he or she can’t get input from others in your family. Another way to get family input is to have a family member and a bank or trust company as co-trustees to get the benefit of both types of expertise. That’s an exception to the general bias against co-trustees.
Whether picking a sole trustee or a family member as co-trustee, many people find themselves naming the same person to many or all of the roles in their estate plan. This should not be a concern because one thing that families do for each other is to take care of each other during difficult times. Any concern about overloading someone can be reduced by attention to the next step.
It is best to ask a person about filling the role before naming him or her. Along the same lines, you should not be concerned that naming one person will hurt an omitted person’s feelings. If the omitted person is not up to the task, you would not be doing him, her, yourself, or anyone in your family a favor by giving that person a task beyond his or her abilities.
I hope this discussion helps start you thinking about the important decisions when making your estate plan. It is not meant as legal advice for your specific situation but as a starting point for a live conversation as part of your legal representation.