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The Flexible Long Term Trust: What flexibility is and why it is important

By Joe Price from the MO Planning Business & Estate Planning Blog

“Prediction is very difficult, especially if it’s about the future.”

Niels Bohr (not Yogi Berra)

Today’s article is about Long Term Trusts and the ways to take full advantage of them. First, a definition: We’ll call any trust that lasts longer than 20 years a long term trust and recommend that flexibility be built in to any such trust that you are involved with.

Importance of Flexibility – Why is it important to build in flexibility? So that you don’t inadvertently tie the hands of the Trustee and cause the beneficiaries to suffer as a result.

So what does a flexible trust look like? Let me answer that by describing a trust that I worked on that was an extreme version of an inflexible trust.

The Extreme Inflexible Trust – In the mid-1980s, a new client brought me a trust agreement that he was very proud of. He said that he and his prior attorney had, over many years and many Amendments, crafted a Trust Agreement that he believed contained perfect and practical investment instructions. The Agreement required the Trustee to invest at least 75% of the Trust assets in the stock of about 30 Blue Chip Corporations that the clients had handpicked.

I suggested to the client that he not tie the Trustee’s hands like that and his face fell. However, he took me seriously and over time began loosening his grip on the allowable investments. Now if you’ve read this far, you already know where this story is going, right? Within 15 years of my first meeting with that client, 8 of the 30 companies had closed their doors.  As of today, 11 of the 30 companies no longer exist. The past 3 decades of business were nothing if not dynamic.

Another Kind of Flexibility – Investment instructions are just one kind of Trust provision that should be kept flexible. Another is the “Distributions to Beneficiaries” provision. Why should that provision be kept flexible? Because beneficiaries’ needs and fallibilities change over time. They may become drug-dependent, they may join “religious” cults; they may rack up sizeable debts with unscrupulous creditors. If the Trust Agreement instructs the Trustee to make mandatory distributions to the beneficiary every year or at certain ages, the results can be unfortunate and sometimes, far worse.

Drugs, Cults and Creditors – The drug-dependent beneficiary who receives a large lump sum distribution during a vulnerable period is a tragedy waiting to happen. The beneficiary who has joined the wrong kind of religious cult is likely to ask you to provide a copy of the Trust to the cult’s attorney who “just wants to look it over to make sure that I am getting everything I am entitled to.” The creditor who knows that the person who has racked up massive debts is a trust beneficiary will want its attorneys to review the Trust to see if it can seize all of the distributions that the beneficiary would be entitled to.

So how would a more flexible Trust Agreement improve each of the situations (and similar situations) mentioned above? The answer is “to an amazing extent, actually.”

If the Trust Agreement instructed the Trustee to make distributions in its complete discretion, the Trustee could refuse to make any distribution in the three cases mentioned. In fact, the Trustee might be able to improve the beneficiary’s situation in each instance because of its discretionary power.

What Flexibility Allows the Trustee to Do – For example, the Trustee could require the drug dependent beneficiary to undergo rehab as a condition of future distributions. Likewise, the Trustee could require the beneficiary to prove that he (or she) had cut all ties with the religious cult before any more distributions were made. Finally, if the beneficiary didn’t have any unprotected assets other than the trust distributions, the Trustee could probably negotiate a favorable settlement with the creditor for the beneficiary individually.

The Potential Downside of Discretionary Power – You may be thinking “That’s all great, but what if the Trustee takes advantage of its power and administers the Trust for its own benefit rather than the best interests of the beneficiary?”

Admittedly, that would be a bad situation and that is why Trust Agreements that give Trustees lots of discretion should have other provisions that put limits on that power if it is being abused.

Checks on the Trustee’s Absolute Power – There are a number of ways to limit the Trustee’s power along those lines, and it is up to the estate planning attorney to suggest (1) the appropriate methods to check the Trustee’s power and (2) who should carry them out. The method that is appropriate for one situation may not work for another because of family dynamics or other reasons.

More on that topic next time…

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