January 2, 2020

By Joe Price

The title of this piece may have caught you off guard. Why should an estate plan fail? Why doesn’t the estate planner foresee the issue and fix it before it becomes a problem?

As it turns out, the reasons that estate plans fail can be grouped into one of two categories; both of them are unforeseeable at the time the planner draws up the estate plan. The first possibility is that a situation arises that the designated trustee handles poorly. The second possibility is that the economy and its effect on your resulting fortune turn out much differently than was projected when your plan was drafted. For better or worse.

Let’s look at each of these issues in a little more detail and ponder that it may take years if not decades for the seeds of the problems to germinate and turn into something more serious.

The Trustee Handles a Situation Poorly

When we talk about a trustee handling a situation poorly, remember that trustees have three primary roles to play: First, the investing of trust funds; second, performing administrative responsibilities like communications with beneficiaries, filing of tax returns and the like; and third, the making of distributions, particularly if the trustee has discretion in determining the amounts and the timing of distributions among the trust beneficiaries.

In our experience, high-quality professional trustees handle the first two of those roles pretty well. It is the third role where the professional trustee needs the assistance and input of family members. On the other hand, family members seldom handle the first two responsibilities (investments and administrative tasks) well and have a mixed record on the third (distributions). In particular, some family members have a difficult time behaving as fiduciaries with their fellow family members because they have complicated relationships with them. For example, a trustee may encounter a situation where the trust does not have enough funds to satisfy all of its obligations. The trustee who is a family member is not likely to spot the inadequate funds issue early enough to fix the situation or know how to fix the situation once it is discovered. Furthermore, he or she may have trouble trying to impose financial fixes on his or her family members since he/she may not be viewed as neutral. The professional trustee is more likely to spot the developing issue early and to impose the correct measures firmly to handle the situation.

Your Fortune is Different Than You Thought it Would Be

We can’t recount every variety of problem caused by this occurrence, but let’s examine two:

A, your wealth is much greater than you thought it would be at the time the estate plan was drawn up. What could possibly go wrong with that situation? What if you provide for distribution of most of your estate to your children at the later of (a) age 25 or (b) at the death of both your spouse and you? You might be thinking that your estate won’t be that large anyway and professional trustees are just so much extra hassle and expense. Then you make a wise investment and die before you expect to. The result is that your 25-year-old child winds up with a distribution of several hundred thousand dollars in cash and no idea how to handle it. If you are lucky, the seamy side of the financial services world won’t find him or her and take advantage of their naiveté, but sadly, sometimes that happens.

What this situation calls for is someone to review the estate plan and say: “Do you know that the provisions in your estate plan are likely to lead to the following result: [something undesirable]?” As you get older, you ought to have someone knowledgeable review your estate plan on a regular basis with your current net worth statement in hand and tell you what the consequences are likely to be.

B, the flip side: Your wealth is much less than you thought it would be at the time the estate plan was drawn up. So, your trust provides for education for the grandchildren in the future and allows the children generous distributions so that they are able to lead fairly extravagant lives in the meantime. Only you made a poor investment later in life so there is not enough remaining in the trust to both send the grandchildren to college and allow children to live their extravagant lives. Something has to give.

What this situation calls for is a professional trustee. That is because an objective party needs to run some projections on what will be needed in the future to fund the grandchildren’s education and how much remains for the children to spend. In addition, an “honest broker” will be needed to deal with the children who don’t agree that they need to restrict their spending patterns. In both cases, it will take someone from outside of the family to play the neutral, unbiased role.

Conclusion

Administering a trust can be an unpredictable business. The estate planner tries to foresee the future when he/she draws up the plan, but after that “life happens” and some situations can’t be foreseen.

I leave you with three thoughts:

One, have your estate plan reviewed regularly to make sure that the assumptions that the estate planner used when he/she drew up the plan still apply. Set forth below is a rudimentary chart of how often you should have it reviewed. A more detailed plan will be published in a future issue.

Age 60 or younger                                                          Every 9 years

Ages 61–70                                                                     Every 7 years

Ages 71–80                                                                     Every 5 years

Ages 81 or older                                                             Every 3 years

Two, unless you are dead certain that your situation will never require a professional trustee and you can articulate why you believe that convincingly to someone who is knowledgeable about trusts, there should be one in your estate plan somewhere.

The most compelling reason for a professional trustee is (as illustrated above) their ability to spot developing problems and to institute fixes before they become impossible to solve. Once situations become impossible to solve, lawsuits among family members become more likely, and a family lawsuit is proof positive that the estate plan has failed.

Three, how do estate plans fail? As one Hemingway character responds in the novel The Sun Also Rises when asked how he went bankrupt, “Two ways. Gradually, then suddenly.”