WHEN IT COMES to estate planning, folks with taxable estates—that is, with assets in excess of $12 million—tend to fall into one of two camps. The first recognize that their estates will have to hand the IRS 40 cents out of every dollar above that $12 million threshold. They also know that this limit is scheduled to be cut in half in 2026 and could be even lower in the future. As a result, they’re willing to put in as much effort as required to limit their exposure to the estate tax.
The second camp, surprisingly, takes the opposite approach. They’re fully aware of this 40% tax, not to mention potential state-level taxes. These folks know that if they don’t do anything to prepare, their estates will almost certainly end up paying more to the government—maybe a lot more. But they aren’t bothered by that. They prefer to not complicate their lives with all the legal and accounting work that estate tax strategies require. Instead, their preference is simplicity and, in any case, they know that their heirs will still have plenty, even after taxes.
To be sure, there’s a spectrum between these two camps, and some families do choose a point in between. But to a surprising degree, I’ve found that the majority of families fall at either one end or the other of this spectrum. Why is that?
I’ll answer this question by relating a brief story: Earlier this year, I was speaking with a young fellow who is the beneficiary of a family trust. He described how, on the one hand, the trustee can be controlling and judgmental. But on the other, he seems to be “asleep at the wheel.” After reviewing the trust’s investment statements, I agreed. There were clear red flags. Unfortunately, however, the trustee didn’t seem to be aware of the issues. Complicating matters is the fact that this trustee is an older family member. That makes it difficult for the young beneficiary to challenge the trustee, especially since this same person controls the purse strings. As he bemoaned the situation, I noted, only half-jokingly, that there’s no such thing as a trust without drama.
If estate tax planning has been on your mind, but you don’t want to inadvertently cause stress like this for your heirs, what steps can you take?
My suggestion is to start by getting very specific about your goals. For example, is the estate tax your only concern, or are you also worried about controlling how your trust’s assets might be used by your heirs? I recommend thinking this through and mapping out a vision for your estate plan well before visiting an estate planner. That’s because lawyers have a broad toolbox. If you tell them upfront what you most want to accomplish, that’ll help them choose the right tools for you to consider.
To map out your vision, I suggest two steps. First—and I apologize for the morbid thought—try to picture your heirs 10 or 20 years after your death. How do you imagine them interacting with and benefiting from your trust? What scenarios would make you happy? What would worry you? That’s the first step in mapping out your vision.
Next, think through the major provisions of a trust. The first is the choice of trustee. The key decision here is whether you would want to appoint a corporate trustee—such as a bank, law firm or trust company—or an individual.
If you go the route of a corporate trustee, a key benefit is that you won’t need to worry (too much) about whether the trustee will be around and available to serve. That’s because it’s the institution itself that would be the trustee. You wouldn’t be dependent on any one individual. Another benefit: Some see corporate trustees as more independent and possibly more objective than an individual. A key downside, though, is that corporate trustees tend to be more expensive. They also have an inherent conflict of interest: Since they only get paid while the trust is in existence, they have an incentive to be stingy with beneficiaries, thereby prolonging the life of the trust.
Alternatively, you could name an individual as trustee. This could be a family member, a friend, or an attorney or accountant. The benefit of an individual is that the cost would likely be lower than what corporate trustees charge. An individual might also be more flexible, plus your heirs might prefer working with a trusted friend or family member rather than a rigid employee of an institution. The downside, though, is that putting an individual in place as trustee may increase the risk of family drama, as described above. Also, no one lives forever. If you go the route of an individual as trustee, you’ll need to think about successors, and that isn’t always easy.
On top of all this, you’ll want to think about distribution provisions. A key issue is timing. Should your heirs be able to access trust funds at any time, or should they be required to first reach a particular age or life stage? You might stipulate, for example, that a child reach age 30 before receiving any funds. Or you could allow for partial distributions over time—at ages 25, 30 and 35, for example. Because it’s very straightforward and limits the trustee’s discretion, that sort of structure can help reduce drama. Everyone would understand and have to abide by simple calendar-driven rules without debate.
Alternatively, you might require that a child finish college or be married before receiving funds. The challenge, though, is that everyone takes different paths through life. Some people don’t go to college. Others choose not to marry. In both cases, though, they might be entirely deserving. As you can see, this can get tricky. The 1999 movie The Bachelor made light of this. But if something like that actually happened in your family, it would be no joke.
The other aspect of distribution provisions is how you’d like your trust’s funds used. You could leave it entirely up to the trustee. That’s the most flexible option but also potentially the most fraught. If a trustee and a beneficiary don’t get along, this setup would give the trustee wide latitude to make the beneficiary’s life miserable for decades. To avoid that, the trust could permit unlimited distributions for specific purposes. These might include tuition, a home purchase or medical expenses. The benefit here is that, for the specific uses you enumerate, your beneficiary would never get stuck in a loop of negotiations with a recalcitrant trustee.
An additional idea is to include with your trust a letter to the trustee. In this letter, you could provide a more complete explanation of your wishes. For example, if your trust will specifically allow distributions for home purchases, you could offer further details in your letter. Should a beneficiary be able to withdraw an extraordinary sum to buy a mansion? What about a second home? If trust funds can be used for higher education, would that be limited to a four-year college? What about vocational school, cooking school or a religious school? Would those qualify? These are all personal decisions. But the more color you provide in your letter, the less drama—hopefully—your beneficiaries will have to endure.