Al W. King III suggests drafting detailed and flexible trusts to ensure that a grantor’s intent is followed, especially because an unforeseen issue can arise.
Individuals can’t anticipate many possible issues when doing their long-term and perpetual intergenerational trust planning. Both judicial and non-judicial modifications1 as well as decanting2 and trust protectors3 have been helpful to amend trust documents to accommodate many of these unanticipated changes.4 The grantor’s intent generally rules the day. Consequently, detailed and flexible trust drafting is generally very helpful.
Beneficiaries
Some of the more common unanticipated happenings with long-term and generation-skipping transfer (GST) trusts involve the definition of children/grandchildren, issue, stepchildren, foster children and spouses and their recognition as beneficiaries.5 This has now moved beyond family births and adoptions to surrogate, in vitro fertilization, artificial insemination and other possible definitions of children and issue.6 Generally, it’s helpful if a trust is drafted specifically to match the grantor’s intent regarding whom he wants to be a beneficiary.
Divorce
Spouses of beneficiaries are sometimes named as additional trust beneficiaries. Because of high divorce rates, these beneficiary spouses can also present unanticipated issues. In some instances, these spouses of beneficiaries may be named as a “floating spouse” beneficiary, that is, the spouse the beneficiary is living with and married to at the time of the distribution.7 Additionally, clauses may require that the beneficiaries sign a pre-nuptial agreement to be eligible for trust distributions. Other clauses require beneficiaries to remain married to their spouses while their children are young to maximize their trust distributions. This ensures that the children will be raised in the same home by two parents. In many of these instances, their distributions are subject to some type of vesting schedule based on the length of the marriage while the children are young. This can result in some miserable but well-compensated married couples.8
Additionally, the high divorce rate, combined with the recent Ferri v. Powell-Ferri,9Pfannenstiehl v. Pfannenstiehl10 and Berlinger v. Casselberry11 decisions, has resulted in many trusts that are drafted as discretionary. This usually limits the divorcing spouse’s access to the trust, particularly if the trust is sitused in a jurisdiction that doesn’t define a discretionary interest in trust as a property right.12 This isn’t the case in Florida; consequently in Casselberry, an ex-spouse was able to garnish the interest of a third-party trust set up by her ex-husband’s father.13 Also, in Pfannenstiehl, the Massachusetts Supreme Court left the door open for future courts to “consider the expectancy [of a distribution] ‘as part of the opportunity of each (spouse) for future acquisition of capital assets and income,’” and even stated that “the existence of a spendthrift provision alone does not bar equitable division of a trust.”14 Hence, if the trust was set up as a separate share versus a single pot trust, then access to the funds in divorce may have been granted. It’s very important to recognize that the spendthrift clause has divorce and child support as exception creditors.15 In the recent case of Ferri, as divorce proceedings were ongoing, the trustees of a discretionary trust of which the divorcing husband was a beneficiary decanted into a newly drafted spendthrift trust without informing the husband. At the time, the existing trust provided the husband a 75 percent withdrawal right to the trust corpus. The new trust instead provided only for a discretionary interest to the husband, eliminating any right to withdrawal. The Massachusetts Supreme Court approved the decant, and thereafter, the Connecticut Supreme Court held that the trust assets were moved out of reach of the divorce by the decant as the new trust was a spendthrift trust and, thus, not considered an asset of the marital estate.16 Consequently, planning for future divorces among family beneficiaries is very important with long-term and perpetual trusts.
Directed Trusts
Directed trusts17 are a great option to deal with unanticipated trust investment and distribution issues. A directed trust allows individuals who establish a trust with an administrative trustee in the directed trust state to appoint a trust advisor or investment committee, who in turn can design an asset allocation strategy and select an outside investment advisor(s) or manager(s) to manage the trust’s investments and direct the administrative trustee accordingly. Individuals may choose multiple advisors based on different asset classes/diversification, which may be as broad as a sophisticated Harvard or Yale endowment-type asset allocation. Alternatively, individuals may select a large non-diversified position in a public or private security. Moreover, the directed trust is able to hold both financial and non-financial assets (that is, offshore companies, business interests, real estate, limited liability companies (LLCs), family limited partnerships, timberland, direct private equity and more). None of these options are possible or practical with the delegated trust statutes18 of most states as a result of laws, risks, time and costs.19 Additionally, the trust can generally establish a distribution committee (DC) to determine when and to whom trust distributions should be made and to direct the administrative trustee accordingly.20 Family members and their advisors can generally serve on these DCs and determine all distributions of income and principal for health, education, maintenance and support. Any additional distributions would be tax sensitive and require an independent person (for example, corporate administrative trustee, CPA, attorney or a combination thereof) who could also be part of the DC. Sickness, disability or incapacity are also usually unanticipated. In the event of these happenings, the DC of a directed trust comprised of family and family advisors can generally best deal with the situation.
It’s currently best to draft trusts as directed for reasons previously mentioned. Additionally, there are several older trusts being reformed and modified to add directed trust administration provisions. This is usually very easy to do and won’t negatively affect grandfathered GSTs.21
Many wealthy families seek to leave their children with ample opportunity to have lives that aren’t only comfortable but also meaningful. To encourage beneficiaries to make a positive contribution, many grantors draft various forms of incentive trusts22 to ensure the beneficiaries are mentored to promote both fiscal and social responsibility with their trust distributions. These incentive trusts are carefully drafted and generally sitused in modern directed trust jurisdictions to maximize their potential.23 It’s very difficult to use an incentive trust practically if distributions aren’t directed by a DC comprised of family and family advisors. Incentive trusts don’t generally work well with delegated trust statutes and with co-trustees versus the DC of a directed trust.24
Jurisdiction-Skipping Clauses
The exploration of other planets, the future possibilities of living on other planets, the potential for asteroids hitting the United States and other related potential issues involving the planet Earth have all resulted in the drafting of very unique jurisdiction-skipping clauses. Many clients have instructed their lawyers to draft intergalactic jurisdiction-skipping clauses. An example of such a clause is “if XYZ Trust Company of [state] cannot serve, then any other comparable trust company in the United States, on the planet Earth, or in the universe may serve.”25 This is also important for clients concerned about global warming and the possibility that their trustees may end up in the ocean at some point in the future. Thus, drafting a clause resulting in the ability to change the situs and the law of a trust can be very helpful. This clause can also be beneficial if a trust jurisdiction doesn’t have modern trust laws or doesn’t maintain its status as an attractive modern trust jurisdiction.
Cryonics
Another uncertainty can arise as a result of various potentially fatal diseases. Nanotechnology has dramatically improved over the years, thus increasing the interest in cryonics.26 Many clients are very interested in cryonic suspension, that is, getting frozen with the hope a cure will be found for what caused their death. They’re generally considered legally dead but not medically dead. They’re carefully placed into cryonic suspension (frozen), potentially for a long period of time, as some people say, “where the elite go to beat the heat and meet St. Pete!”27 Trusts are set up, either as beneficiary trusts28 or purpose trusts without beneficiaries,29 to accommodate these individuals. These trusts are specifically drafted to accommodate the initial cryonic suspension, the monitoring and maintenance of the cryonic suspension and the possible return to life.30 Life insurance can sometimes pay for all of this.
Pet Trusts
Another unanticipated event may involve a client predeceasing his pet. Thus, the need for a pet trust. Every state and Washington, D.C. has some form of pet trust statute. Some states have statutes that are more flexible with longer durations compared to statutes in other states.31 It’s very important to coordinate the duration of the trust with the life of the pet. Dogs and cats have relatively short life spans (roughly 15 years for both), which most pet trust statutes can accommodate.32 Many other pets have very long life spans (for example: horse, 25-30 years; macaw, 35-60 years; tortoise,100 years; donkey, 45 years; eagle, 55 years; parrot, 80 years; and American box turtle 123 years).33 Despite what many people think, pets are property. Consequently, pet trusts are generally purpose trusts without beneficiaries. The amount of trust funds a jurisdiction may allow to be spent on a pet may vary. In 2007, the billionaire Leona Helmsley left behind a $12 million trust for the care of her Maltese, Trouble, who was fed crab cakes and Kobe beef, provided $8,000 in yearly grooming fees and assigned her own $100,000 per year security team.34 The security team was necessary both because of kidnapping as well as death threats to the dog due to the number of people she bit.35 When Trouble died, the money remaining for her care was used for charitable purposes. The original trust was sitused in New York. New York put many restrictions on the trust, as well as on the amounts that could be expended for Trouble. Consequently, the trust changed situs to South Dakota to accommodate the grantor’s intent as well as the desired results for Trouble and various pet charities.36 Additionally, some pet owners may elect for their pets to be put into cryonic suspension (frozen) with the hope that a cure may be found for what caused their pet’s death, so that the pet can be cured and brought back to life.37 Thus, the duration of the pet trust may also be an important consideration. Grantors who want to provide extensively for their pets should consider all of these factors.
Future Lawsuits
Lastly, grantors can’t anticipate future lawsuits so it’s crucial that they plan accordingly with their trusts. Some of the modern trust jurisdictions have powerful privacy protections38 in the event of lawsuits. Additionally, some trust jurisdictions have statutes providing for the reimbursement of legal fees if someone sues a trust/trustee and is unsuccessful.39 Furthermore, beneficiary quiet provisions can also be helpful in limiting the amount of trust information that beneficiaries may receive, which can help with minimizing lawsuits.40 These beneficiary quiet provisions also differ by trust jurisdiction.41 Typically, trust drafting, situs selection, proper trust administration, layering with LLCs and special purpose entities and/or trust protector companies all minimize situs in the client’s resident jurisdiction and maximize situs and the laws of the trust jurisdiction (which typically provides greater asset protection), thus resulting in powerful asset protection/wealth preservation.42
These are just a few of the key unanticipated changes that a client can protect against with proper trust planning.
Endnotes
1. Non-judicial modification/non-judicial settlement agreement statutes typically allow the beneficiaries, the grantor and/or other interested parties to modify an existing trust document without having to go to court. Certain states also provide judicial reformations/modifications, typically brought by a petition to court by the trustee or majority of beneficiaries.
2. Currently, 27 states have decanting statutes. Generally, decanting is a discretionary distribution by a trustee of an older trust to a newly drafted trust. The power to decant derives from the trustee’s authority to distribute to one or more beneficiaries under the trust document, which is typically referred to as the “power to invade the trust.” However, with a decant, instead of distributing the trust corpus outright to a trust beneficiary, the trustee distributes or pours over the trust corpus to another trust. See Al W. King III, “Decanting is a Popular Strategy, But Don’t Ignore Several Key Considerations,” Trusts & Estates (August 2018).
3. Trust protectors are recognized by statute in many of the modern trust jurisdictions (that is, Alaska, Delaware, New Hampshire, Nevada, South Dakota and Wyoming) and generally have many important personal or fiduciary powers that increase trust administration efficiency. Typically, those powers include the ability to remove or replace trustees/fiduciaries, veto or direct trust distributions, add/or remove beneficiaries (or appoint someone to do this), change situs and the governing law of the trust, veto or direct investment decisions, consent to exercise power of appointment, amend the trust as to the administrative and dispositive provisions, approve trustee accounts and terminate the trust.
4. King, supra note 2; Al W. King III, “Are Irrevocable Trusts Truly Irrevocable?—Reformation, Modification, Decanting and Trust Protectors,” Berks County Estate Planning Council (March 16, 2016).
5. Angie O’Leary, “Planning for Modern Families,” Wealthmanagement.com (Jan. 8, 2018).
6. Wendy S. Goffe and Kim Kamin, “Estate Planning for Users of Assisted Reproductive Technology,” Think Advisor (Oct. 4, 2017).
7. Al W. King III, “Preserving Family Values by Encouraging Social and Fiscal Responsibility with Modern Trust Structures,” Allied Professionals, Orange County, Calif. (September 2017).
8. Al W. King III, “Are Incentive Trusts Gaining Popularity,” Trusts & Estates (October 2017).
9. Ferri v. Powell-Ferri, 476 Mass. 651 (2017); Ferri v. Powell-Ferri, SC19432, SC19433 (2017).
10. Pfannenstiehl v. Pfannenstiehl, 55 N.E.3d 933, 941-42 (Mass. 2016).
11. Berlinger v. Casselberry, 133 So.3d 961, 962 (Fla. Dist. Ct. App. 2013), appeal denied.
12. Some states codified the common law and Restatement (Second) of Trusts, which defines the types of interests a beneficiary has in a trust, and therefore, the rights of a beneficiary’s creditors. Consequently, in those states, a discretionary interest in a trust isn’t a property interest or an entitlement. States with a discretionary support statute include Alaska, Delaware, Nevada, Oklahoma and South Dakota.
13. Supra note 11.
14. Supra note 10.
15. Ibid.
16. Supra note 9.
17. Generally, directed trusts allow families to tailor the trust to their needs regarding asset allocation, diversification, investment management and distributions, all while significantly increasing flexibility, control and liability protection. States with strong directed trust statutes include Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
18. All 50 states and Washington, D.C. have a delegated trust statute. This structure typically involves a family trustee who generally delegates certain responsibilities. It’s important to conduct due diligence on whom he’s delegating to and why he believes that the delegation is prudent. In addition, the delegating trustee is generally responsible for ongoing monitoring of the co-trustees and/or fiduciaries to whom he’s delegated. However, while the trustee is delegating the function, he isn’t delegating the liability and risk.
19. Al W. King III, “Myths About Trusts and Investment Management: The Glass is Half Full!” Trusts & Estates (December 2014).
20. Directed distributions are allowed in most directed trust states (that is, Alaska, Delaware, New Hampshire, Nevada, South Dakota and Wyoming). Some exceptions are Oklahoma and Utah.
21. Regarding directed trusts, note the Wallace case, in which the court rejected an unopposed petition by the income beneficiary of an older 1934 trust to modify its administrative terms to allow for modern investment provisions involving both an investment advisor and a directed trustee. The court held that it would contradict the settlor’s intent despite arguments that the beneficiaries may be better served by the directed trust. In re: Trust Under Will of Wallace B. Flint, 118 A.3d 182, 193 (Del. Ch. 2015). This is an interesting and unique result because the directed trust laws weren’t in place at the time the trusts were executed. This type of reformation to a directed trust would generally be permitted in most of the modern trust jurisdictions.
22. Supra note 8.
23. Popular directed trust states include: Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
24. Supra note 8.
25. Al W. King III, “Designing the 21st Century Irrevocable Trust,” Guardian’s BRC Symposium (August 2015).
26. Nanotechnology uses microscopic robots that would theoretically be able to clean and heal individual human cells. Al W. King III, “Freezers—Our Future Coffins?” Trusts & Estates (August 2002). A leading cryonics organization, the Alcor Life Extension Foundation, has posited that “nanotechnology will eventually lead to devices capable of extensive tissue repair and regeneration, including repair of individual cells one molecule at a time.” See Alcor Life Extension Foundation, “What is Cryonics?”
27. King, ibid.
28. Traditionally a self-settled/third-party spendthrift trust established by a grantor for the benefit of named beneficiaries, including the grantor who will be entering into cryonic suspension. Self-settled trusts, if properly structured, allow the grantor to be a permissible beneficiary of the trust.
29. Generally, a purpose trust is created for a purpose (something) rather than for beneficiaries (someone). Its sole purpose is to care, protect and/or preserve an asset or a purpose. Although all states and Washington, D.C. allow for pet trusts (a form of purpose trust to care for a pet), only some states permit broad purpose trusts that would allow for a variety of purposes and assets including cryonic suspension, grave sites, antiques, cars, art, jewelry, memorabilia, royalties, digital assets, land, maintenance of private family trust companies, property and buildings. States with broad purpose trust statutes with long durations include Delaware, New Hampshire, South Dakota and Wyoming.
30. Mark E. House, “Do Zombies Pay Taxes?” WealthManagement.com (Dec. 20, 2017).
31. Delaware, New Hampshire, South Dakota and Wyoming all have pet trust statutes that allow for a longer duration compared to statutes in other states. Al W. King III, “Powerful Planning Opportunities Using the Top-Rated Domestic Trust Jurisdictions, i.e., Alaska, Delaware, Nevada, New Hampshire, South Dakota & Wyoming” (Mercer County Estate Planning Council Feb. 7, 2018).
32. A typical pet trust statute covers 21 to 25 years or until the death of the animal, whichever occurs first.
33. Al W. King III and Pierce H. McDowell III, “A Bellwether of Modern Trust Concepts: A Historical Review of South Dakota’s Powerful Trust Laws,” South Dakota Law Review (Summer 2017).
34. Cara Buckley, “Cosseted Life and Secret End of a Millionaire Maltese,” The New York Times (June 9, 2011).
35. Tom Leonard, “Housekeeper sues Leona Helmsley’s £6m dog,” The Telegraph (Sept. 5, 2007).
36. Supra note 34.
37. King, supra note 26.
38. Generally, most state statutes and courts provide that all court trust matters will be public with few exceptions. This is the general trend. However, some states allow for the court to seal trust information on a case-by-case basis by petition, and some seals are limited to a period of years (for example, Delaware). Generally, a good reason is necessary to obtain the seal. South Dakota, on the other hand, provides that all court matters involving trusts are to be sealed automatically in perpetuity.
39. Al W. King III, “Defend Against Attacks on DAPTs,” Trusts & Estates (October 2014).
40. Alaska, Delaware, New Hampshire, South Dakota and Wyoming all have beneficiary quiet statutes that allow for trust information to remain confidential from beneficiaries until instructed otherwise by the grantor/advisor/trust protector, as opposed to the typical right to trust information/accounting provided to beneficiaries. Some states allow for this beneficiary quiet provision to continue even after the grantor’s death, disability or on receiving a trust distribution. Al W. King III, “Should You Keep a Trust Quiet (Silent) From Beneficiaries?” Trusts & Estates (April 2015).
41. Ibid.
42. Supra note 39.