And What to Look For So You Can Tell the Difference and Protect Yourself

By Richard E. Durfee Jr.

In today’s day and age, when all legal documents are prepared on a computer, it seems reasonable to assume that all trusts will be more or less the same. After all, attorneys are notorious plagiarists and routinely copy documents from one another. Isn’t one living trust, for example, pretty much the same as another? Absolutely not! In fact, there are major differences – and what you don’t know about the differences can cost you a great deal of money and aggravation. (This is true both for clients and for the attorneys who prepare their documents.) The purpose of this article is to share some of the insights gained through reviewing and drafting thousands of trusts.

1. Danger Signs. Although not exhaustive or conclusive, the following checklist provides some of the major danger signs that a trust may not be adequate or appropriate:

• Too short (16 pages are simply not enough to include everything that ought to be in most trusts)
• No A-B-Q-D provisions for revocable trusts (Survivor’s, Credit Shelter, Q-TIP and Disclaimer)
• Uses the word “revocable” in the trust name
• No deeds, assignments, or other transfers to the trust
• No Schedule of Assets transferred to the trust
• Recommendation by trust preparer to leave assets out of the trust
• Names and other critical information buried in the text rather than set out at the beginning or end
• Trust not prepared or reviewed by an attorney
• Unnumbered and/or unlabeled paragraphs
• No named Successor Trustees (or less than three)
• No provisions handling “community” or “joint” property
• No Generation-Skipping Transfer Tax planning provisions
• No Protector (important for all trusts, but especially for irrevocable trusts)
• No system for handling disputes and avoiding law suits
• THE TRUST IS MISSING ONE OR MORE OF THE PROVISIONS DISCUSSED BELOW:

2. The Spendthrift Shield to Creditor’s Claims. To be complete, virtually every trust should include a “Spendthrift” provision. Spendthrift provisions protect the trust assets from being involuntarily seized to satisfy creditors’ claims against a beneficiary. In effect, a Spendthrift provision prevents the Trustee from making distributions that would be taken away from the beneficiary. For revocable living trusts, the spendthrift provision comes into effect only after at least one of the grantors is deceased. Also, even if a trust has spendthrift provisions, the spendthrift clause can be frustrated by inappropriate mandatory distribution formulas. To preserve the protection that the spendthrift clause provides, it is vital that the distribution provisions be discretionary.

3. The Defense of Discretionary Distributions. Many poorly drafted trusts provide for mandatory distribution at a certain age, or upon certain conditions such as death of the Grantor. Although this arrangement is simple, it is dangerous. When assets arbitrarily distribute from a trust, all the other benefits of having a trust are immediately lost. With mandatory distributions there is no way to avoid a harmful distribution. For example, without discretion to avoid a distribution, money will come out of the trust even if it will be lost because a beneficiary is in the middle of a bankruptcy, divorce, lawsuit, business failure, drug or gambling addiction, or one of life’s other little disasters. When the trustees have no discretion to avoid distributions, the trust may end up hemorrhaging money at the worst of all possible times.

4. Avoid the Tyranny of an Inappropriate Trustee. Without the right trustee, the purpose of a trust can be destroyed. There are many situations where it is far better to have family members serve as trustee. There are other situations, however, where a bank or corporate trustee is absolutely the best alternative. It is important to know which is right for your particular family. Also, certain transactions involving an irrevocable trust require a “non-subordinate trustee” — one who is not a spouse, sibling, or child. Often, people are simply directed to one kind of trustee or another without seriously evaluating what is best for their unique situation. For the most part, family member trustees are easier to work with, cost less, and allow greater flexibility. Nevertheless, it is often better to have a bank trustee where there is a high risk of a family fight, a lack of financial sophistication among family members, a risk of trust assets being depleted through abuse or neglect, no adults (only minor children) in the family, a disinheritance or unequal distribution, or no living descendants. There are also a number of combination arrangements that can be made — for example, having a family trustee that must take the investment advice of a corporate fiduciary or investment advisor. Many of the expenses and problems that arise in running a trust can be avoided by carefully selecting the appropriate trustee.

5. Maximizing the Trust Benefits with Dynasty Provisions. Not having Dynasty Provisions is like having no trust at all for the children and grandchildren. Dynasty Provisions enable the trust to continue in existence for the maximum amount of time permitted by law. The inclusion of Dynasty Provisions means that the benefits of having a trust will continue as long as possible. Generally speaking, a trust may continue in effect for the lifetimes of the children and grandchildren of the grantors (which means there must be sub-trusts for both). In some places, trusts are prevented from existing forever by an archaic and confusing rule of law called “the Rule Against Perpetuities.” A number of states (and foreign jurisdictions) have abolished the Rule Against Perpetuities. A welldrafted trust will permit the situs of the trust to move to a jurisdiction that has thrown out the Rule Against Perpetuities — so that the trust is not compelled to arbitrarily terminate. If a trust is worth setting up in the first place, it is worth including Dynasty Provisions so that it can last for as long as it will benefit the family.

6. Protection Against Abuse & Dissipation. A trust should be structured so that it will truly benefit, rather than harm, the beneficiary. One of the most tragic challenges in administering a trust is to have a beneficiary that uses trust proceeds to finance a selfdestructive lifestyle of drugs, gambling or alcohol abuse. To prevent such misuse, a welldrafted trust will permit the trustee to withhold trust funds if a beneficiary has an addiction to such harmful substances. The trustee should be empowered to use the trust assets where appropriate for the beneficiary’s health care, rehabilitation, and other needs, and at the same time have the power to stop providing trust assets to feed a beneficiary’s selfdestructive habits. Sadly, failing to include such protection in a trust is a very common error, and we have seen horrible consequences for the family and the estate as a result.

7. The Protector and Risk Minimization. A trust without a Protector, is a trust at risk. The Protector is a neutral third-party with no beneficial interest in the estate, who has certain narrow powers with respect to the trust. Generally speaking, the Protector’s powers cannot be unilaterally exercised, but must be invoked by the grantor or a majority of the adult income beneficiaries. Typically, the Protector will have the power to do two things: Î remove a trustee that is not cooperating or harmful to the trust, and Ï fine-tune the provisions of the trust to recover from a “tax ambush” — which is what happens when Congress changes the tax rules on a trust after it has become irrevocable. Protector provisions are particularly important for irrevocable trusts — which even so-called revocable trusts will eventually become. Although some jurisdictions now recognize protector provisions by statute, too many trusts are put at risk because, without a Protector, they have no means of making course corrections once the trust is irrevocable.

8. Customizing the Trust with Statements of Wishes Creating Incentives. A welldrafted trust will not merely give a beneficiary “something for nothing,” but will incorporate the grantors values and perhaps create incentives for the beneficiary to do what is right. The best vehicle for accomplishing this is for the trust to recognize and permit the grantor to make Statements of Wishes. Statements of Wishes are technically “non-binding precatory instructions” to the trustee. They permit the grantor to make value statements and give the trustee instructions on when, where and how the trust is administered. When a trust recognizes the grantor’s Statements of Wishes, it enables the grantor to customize the trust to fit the unique family needs without incurring substantial attorneys’ fees, and without “hardwiring” in provisions that must be removed by amendment when circumstances change. Recognized Statements of Wishes make family values, and the grantor’s wishes, part of the legacy in a trust.

9. Avoid the “Spoiled Rich Kid” Syndrome. The last thing most people want is for their wealth to ruin the up-and-coming generations. This is especially true of those who have a strong work ethic, and believe that all of us should be productive members of society. Statements of Wishes creating incentives, in combination with discretionary distribution provisions and protection against abuse are powerful tools to help prevent a trust from spoiling the beneficiaries. There is simply no way to predict in advance when a particular child or grandchild is going to be ready to handle the money that comes out of a trust. One might be ready at age 18, while another might not be ready at age 40. The same beneficiary may be ready at one age, and not ready at another age. Experience has taught that rather than making mandatory incremental distributions based on age or particular events, it is better to give the trustee the discretion to either make or not make a distribution based on need and ability, and based upon satisfying the conditions set by the Statements of Wishes. When all the pieces to a trust fit together properly, it will encourage and reward the children and grandchildren for living useful and productive lives, and minimize the risk of spoiling posterity.

10. Flexibility and Planning for Tax Minimization. There are many highly technical aspects of planning a trust that go beyond the scope of this article, but which will make a major difference in how the trust is administered, taxed, and distributed. An inappropriate provision can be both costly and aggravating. Some issues to consider include the following: Is there equalization between branches of the family notwithstanding unequal gifts? Are there provisions to make up for special expenses such as weddings or schooling expenses that older children may have had but younger children not received yet? Does the trust include A/B provisions to protect the unified credit of the first spouse to die? Does the funding formula for trust B permit some flexibility in selecting assets, or does it lock the surviving spouse into an inflexible and arbitrary allocation? Does the trust have a “safety valve” to prevent automatic distribution of income from trust B when assets in trusts A and Q exceed the lifetime exemption of the surviving spouse? Is there a requirement to exhaust trust A before trusts Q and B in order to minimize estate taxes on the second death? Does the trust permit income to “spray” to the grandchildren from trust B to provide for present needs? Does the trust utilize the maximum exemption to the Generation Skipping Transfer tax? Most errors in these areas are encountered in trusts that are simply too short to deal with the technical issues.

11. Avoid Penalties of Poor Marital Tax Planning. Too often, trusts fail to take advantage of the benefits that the law provides married couples, and may unnecessarily expose the trust assets to avoidable risks and taxes. A simple “I Love You Trust” where husband and wife leave everything to each other, for example, can cost hundreds of thousands of dollars in avoidable estate taxes. As another example, does the trust maximize the use of community property where permitted? Also, the inclusion and funding formula for a Q-TIP (Qualified Terminal Interest Property Trust) should be based upon such factors as disproportionate age between husband and wife, disproportionate assets (significant separate property) between husband and wife, blended families (children from prior marriages), financially unsophisticated or vulnerable spouse, marital disharmony, one spouse with a high risk profession or business, and high risk of health care costs for the surviving spouse. Are there provisions to allow the surviving spouse to disclaim assets (and get future appreciation out of the survivors taxable estate)? Marital tax planning is a virtual field loaded with land mines for the unwary to step on.

12. Know Asset Protection or No Asset Protection. When a trust ignores asset protection issues, it is like leaving your own money on the table for someone else to pick up. All trusts cannot protect all assets at all times. All trusts can, however, protect some assets at some times, and a well-drafted trust will include provisions that maximize the asset protection available under the law. Frequently overlooked features that give some asset protection in the children and grandchildren’s generations are the Spendthrift, Discretionary, and Dynasty provisions discussed above. None of us would deliberately put our money (or our children’s money) in a bank if we knew it could be seized by the creditors of other depositors. Why should we do essentially the same with a trust?

13. Follies of the Failure to Fund. One of the most common mistakes made with a revocable living trust is to leave assets out. This is generally the result of either a lack of understanding of how a trust works, or bad advice from the trust preparer. A common misconception is that if there is a Pour Over Will no funding is necessary. (This results in a probate and effectively converts the living trust into a testamentary trust.) In some cases we have seen a trust preparer erroneously recommend leaving assets out of a trust — this is almost always a mistake (unless the assets are so small and inconsequential that there will be no probate). Leaving significant assets out of the trust means that there will be a probate. In some rare cases we have seen attorneys give that advice in order to “double dip” — to get paid for putting the trust together and to get paid again to do the probate because the trust is not funded. Stay away from any advisor who makes such a recommendation. A trust without assets is no trust at all. The bottom line is, if you are going to spend the time and money it takes to set up a trust, you might as well get all the benefits it will provide by putting your assets into the trust.

14. Mechanism for Avoiding Estate Devouring Lawsuits. One of the most destructive events that can happen with a trust is for the various parties to sue each other. Obviously, problems occasionally arise which must be resolved, and which may require the intervention of the courts. At the same time, it has been said that law suits are a mechanism for disinheriting the family and leaving everything in an estate to the lawyers. A well-drafted trust will strike a balance by providing for dispute resolution in a costeffective manner, while at the same time eliminating the filing of law suits as an automatic response to every difficulty that may arise. We have found that the most comprehensive and effective procedure for accomplishing this balance is the alternative dispute mechanism of communication, negotiation, mediation, and arbitration found in the Integrity Agreement. Generally, healthy and functional family members will seek to avoid litigation in any event. When there is no established procedure for solving problems as they arise, other family members can be held hostage by those who see litigation as an effective way to get their own way or to obtain a bigger “piece of the pie.” Harmful inter-family litigation can be avoided by including appropriate safeguards in the trust.

15. What to Do About It? If any of these matters are a concern to you, here are some practical steps you can take:

• If you have a trust already, read it yourself and/or have it reviewed by a qualified attorney or estate planner.
• Check your own trust against the concerns listed in this article.
• Review the letters of instruction that you received with your trust and make sure you have completed all action items.
• Make sure all your assets are transferred to your trust.
• Schedule a review conference with the attorney or planner who prepared your trust.
• If you have a trust that was prepared by a non-attorney, with very rare exceptions, we strongly recommend you have it reviewed by an attorney.
• If you do not have a trust, explore whether one is appropriate for you.
• Select a qualified attorney or estate planner who is familiar with the kind of planning issues raised in this article — there are many highly qualified attorneys who practice in this area — check them out carefully.

16. Sample Questions to Ask a Prospective Attorney: You want to be totally comfortable with any attorney or estate planner you choose to work with. The following sample questions may help you learn more about whether an attorney is the right one for you:

• How much of your practice is involved in estate planning? (Unless your estate is very small and very simple, stay away from the “dabbler” who does it only once in a while)
• How long have you been practicing in the estate planning area?
• What is the typical size of the estates you plan?
• Do you handle both pre-death planning and post-death administration?
• Have your trusts been reviewed by the IRS?
• What ongoing services and costs are involved in setting up a trust?
• How are you rated by your professional peers (Martindale-Hubbell)?
• What organizations do you belong to?
• What distinguishes you from the others who practice in this area?

17. Conclusion: What you don’t know about your trust can hurt you (or at least cost you and/or your estate money). Because a trust is going to affect the lives and well being of many generations, it is worth doing it right. The final questions are: if you died today, are you certain your present trust will accomplish what you want? If not, what are you doing about it?

In fairness, in reviewing hundreds and perhaps thousands of trusts, many of them are very good, well structured, and highly effective. One of the benefits of reviewing other high quality trusts is the ability to capture good ideas and incorporate them into the documents we use. Not every trust needs to be replaced. When we find a good trust that is adequate to the client's purposes, we prefer to leave it in place. Often, the client just needs help putting to good use what they already have in place.

Is your Trust everything you want it to be? Would you like a second opinion?

Here’s the Truth About ‘Secret’ Retirement Plans and Personal Bank Accounts

You’ve seen the hype. Now, let’s look at the facts.

There’s a widely promoted estate and financial planning strategy I’m often asked about. It’s been called the Secret 770 Account and the President’s Account. Other names are Banking on Yourself®, Infinite Banking®, LIRP, and Becoming Your Own Banker®. I’ve also seen it described as The Personal Bank, The Power of Zero, and The Retirement Miracle. Ed Slott, CPA and IRA expert, refers to it as “the single most important benefit in the tax code.”

Many of the promotions say the strategy is confidential, new, revolutionary and, of course, Wall Street’s hidden secret. Also, banks and Wall Street don’t want you to know about it, and only a privileged few of the well-connected have been able to use it, such as presidents, major corporations and the very wealthy.