Estate planning is the preparing of legal documents to carry out your testamentary intent. Estate planning does not just take into account the high net worth individual who is primarily concerned about estate taxes, but rather planning for everyone’s testamentary intent. Testamentary intent is what you want to happen when you die. Notwithstanding, the general definition estate planning can include sophisticated gifting options to reduce one’s taxable estate and avoid or diminish federal and state estate taxes.
Today, I was reminded of an Estate Distribution schedule not often found in Last Will and Testaments or Revocable Trusts, but enough to make me question why it would ever be included. Part of my daily activities at my office is reviewing clients’ and potential clients’ estate planning documents. Sometimes this includes just a 2 page will, or as in the case today, it can include a husband and wife 15 page Last Will and Testament and two 50 page operating agreements which included buy-sell information. I can usually find something to bring value to the client or potential client because if nothing else time passes and these types of documents are often not updated.
More often than not a distribution schedule follows a very simple and similar pattern:
- Everything to Surviving Spouse usually outright and not in a QTIP or marital trust
- If Spouse predeceases everything to Children in a Trust
I am going to ignore talking about estate taxes and why this may not be a proper distribution schedule for a large amount of people, rather, I want to discuss a subset of the second half of the distribution schedule.
Why Would Anyone Provide for a Pooled Family or Children Trust?
We all know that money can do good things and money can do very bad things which is why I am a huge advocate for the use of Trusts to protect people from themselves. I know 21 year old Evan would never have been able to handle a large inheritance. Most of the time when it goes to the Children it is put in a Trust and it will read something like:
- *Assets split into equal trusts for each child *
- Before 21 income and principal to the child at the Trustee’s discretion
- After 21 He or She gets income but Principal is still at the Trustee’s Discretion
- One-Half then principal at 25
- Remainder at 30
Sometimes principal will never be distributed, sometimes even income is withheld it is all about your/the client’s testamentary intent. Seems reasonable, but today I saw a distribution schedule that seemed not only odd, but in direct contradiction to most people’s testamentary intent if they are lead to the inevitable conclusion.
Rarely, I will see a distribution schedule which will say that all assets going to the children are held in a common or pool trust until the youngest reaches a certain age. Why would anyone do this? Because the testator is looking at their assets as family assets and the trust will act in his or her as “Bank of Mom or Dad.” But what is really happening? Let’s use the extreme example
- 2 Children
- Daughter 1 is studying to be a doctor
- Daughter 2 decided college wasn’t for her and she has already met the man of her dreams who is making bank at the age of 22
- Trust forces assets out when Child 2 is 30
Becoming a doctor is expensive and she runs through a couple hundred grand of the $1,000,000 left behind. Child 2 never really needed the money so she just ignored the trust fund. Finally, Child 2 hits the age of 30 and the assets are split, but instead of $1,000,000 there is now only $700,000. When $700K is split it leaves $350,000 to Child 2 but $650,000 of value to Child 1.
Sometimes, I’ll see a provision that provides an off-set, but even that wouldn’t work that well if Child 1 uses more than half.
Does anyone have this type of set up? Why did you choose to use it?