Estate planning for an unpredictable future
Key organizational and operational components of a trust.
November 5, 2012
As professional advisers, we help clients plan for the future—yet none of us knows what the future holds. We must, therefore, do our best to help create a solid, yet flexible, foundation that will accommodate changes to the family, the business, and the tax and regulatory environments. When we work with a client to help create an estate plan, we make sure that plan is implemented and executed. We might then feel that our job is done. But in reality, our job is done only if the client happens to die the very next day.
At the initial client meeting, it is our responsibility to explain that creating an estate plan is an ongoing process—a movie, not a snapshot. The planning documents are but one frame. Once that concept is clearly explained, the client should understand that the plan needs to be continually reviewed and revised.
For many families, the most important estate planning document is the trust. It is the document that may continue past the client’s lifetime, past the spouse’s death, and past the death of the children. Over the past 20 years, many advisers and clients established a trust for tax purposes—to reduce the estate taxes that the family will pay when both spouses die. But there hasn’t been nearly enough focus on the nontax components of the trust arrangement.
As advisers, we must be aware of the dual components—organizational and operational—of using trusts in estate planning. The organizational structure is established when the trust is signed. The operational structure starts from that point and continues on. The family, the laws, and the investments will all change—and the fiduciaries will need to make decisions.
Organizational components of the trust
For many clients, the foundation of estate planning is the trust and its provisions. This fundamental organizational document lays the groundwork for later implementation, so it is important to pay careful attention to the wording. Some key organizational components include:
Operational components of trust administration
The organizational components of the trust document outlined above are the guide to how the trust will be operated—from the date the trust is signed until the date the trust ends. Key operational components of trust administration include how the clauses in the trust are interpreted and implemented. To understand the scope of the administration it is important to contemplate issues such as:
When making these decisions, the trustee should be aware that the pattern of distribution can have consequences to the creditors of the beneficiary. There may also be considerations in a divorce—what, if anything, is the soon-to-be-ex-spouse of the beneficiary entitled to? The trustee will also have to decide the process for evaluating bequests from the beneficiary. A face-to-face meeting? Communicating by phone or email? Who is to be consulted? Are there provisions in the trust that require monitoring—such as no distributions if it is believed that a beneficiary suffers from substance abuse? If so, how should that be monitored? Is there a withdrawal right? In other words, does the beneficiary have the right to withdraw funds no matter what the trustee says?
Once the trust is signed, you and the client should discuss when the plan will be reviewed next. Many advisers encourage their clients to write an annual letter to the trustee, which might contain provisions that are read only when the trustee is administering the trust. As life changes, the client could send this letter to help guide the trustee on issues relevant to administering the trust—such as troublesome marriages, creditor issues, special needs, mental illness, and substance abuse.
Since the primary decision for establishing a trust may no longer be to reduce estate taxes, it is important for advisers and clients to keep the organizational and operational components in mind, paying careful attention to meeting the trust’s goals and objectives.
The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy, and guidance for CPAs who specialize in providing estate, tax, retirement, risk management, and investment planning advice to individuals and closely held entities. All members of the AICPA are eligible to join the PFP Section. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist credential holder. Visit aicpa.org/PFP to learn more.
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