Life Can Be Complicated: Factors That May Affect The Positions and Appointments in Your Estate Plan.

Introduction.

A seemingly infinite number of factors might affect the decisions you make on who to name in each position in your estate plan. Identifying and weighing these factors may be more art than science. But it is essential to take a broad view of your decisions. The following discussion will review many of the considerations you might weigh and explain the possible implications of selecting key people. 

Some of the considerations can be pretty technical. For example, if you name a beneficiary as a trustee, that beneficiary will have to have certain restrictions on their ability to make distributions to themselves to avoid having trust assets included in their estate and reachable by their creditors. Not all such nuances can be addressed in this paper. 

Holistic Human Planning. 

Family. Addressing families, aging, and marital status are only some of the many human factors more commonly addressed in estate planning and trust drafting. The world continues to evolve and become more complex. Societal norms, values, and family structures have changed dramatically recently, and old-style planning and drafting may not meet your needs. One implication is that the stability naming family may have provided in the past may not be something you can rely on in your planning. If that is your situation then naming two or more people in some roles might be prudent. It may increase the need to name a successor for many or even all roles. Having checks and balances is perhaps more critical.  

Modern family dynamics are forcing modern trust drafting to evolve. Family relationships are more varied than ever before in history and are likely to continue developing.  The number of single people has grown dramatically. The assumption that planning can rely on a spouse or child as your agent is irrelevant to many people. as a source of access to assets in an irrevocable trust or to be a trustee is not valid for many people. That is critical as so much of the information you find on estate planning continues to focus on, even assume, a nuclear family when that is not the norm for most families. When you consider the people you will name, the illustrations you often see will not help much. Once you move beyond a nuclear family for people to appoint to vital positions to your estate plan, e.g., to protect you as you age, it may be more important to consider the safeguards discussed in this article and other positions to provide checks and balances on those you name to various roles.

Reproductive technologies continue to advance and stretch the definitions of “issue.” How should child or heir be defined? What can be done to integrate flexibility to deal with future issues that we cannot envision today? What definitions of “descendant” should be used? Might a Trust Protector or other person be given some latitude to modify the definitions to keep them current with evolving technological options? See the discussion below, for example, of a special LGBTQ Trust Protector to address these issues. 

Silver divorce is the fastest-growing demographic for divorce, and if the trend continues, it will require rethinking many aspects of who you appoint in your documents. For example, more trusts utilize the concept of a floating spouse. That is, the person you are married to at any given time is treated as your spouse and, perhaps, as a beneficiary. That concept was rarely used in more traditional trusts. So, is naming a brother-in-law given the high divorce rate, or is using a floating spouse definition really advisable? Relying on the permanency of any relationship for planning purposes may not be prudent in most instances. 

State Law. A traditional trust is often named your home state for all purposes and provides no means of changing your trust’s governing law or situs (location) to a different jurisdiction. This has evolved in the modern trust to use whatever jurisdiction provides better tax or legal planning benefits and the naming of a trustee (whether merely administrative or something more) to create nexus (connection) to that favorable jurisdiction. Provisions in a trust document to change the situs are common. These considerations may affect the positions in your trust and who you appoint. For example, adding a person called a trust protector who is empowered to move a trust to a different state may be advantageous. If you decide to have a trust you create in a state that offers tax advantages, you may need to designate a trustee in that state and perhaps avoid naming one in your home state. Your home state may have a limited duration for which trusts can last, and it may be preferable to create the trust in a jurisdiction that permits longer-term trusts (a longer perpetuities period).

Example. You’re a resident of State A and set up a trust in State B, which has lower taxes and more favorable trust laws. You are naming an institution (trust company) in State B as the administrative trustee to have State B law apply. You named herself the investment trustee so you can control decisions on the family business you will gift to the trust. You name your sister as the trust protector of the trust. Both you and your sister live in State A. However, having two persons in State A active in the trust’s administration may create a risk that the courts in State A will determine that State A law applies. You might trigger the State A taxes you were trying to avoid. Another approach might be to create a limited liability company (“LLC”) formed in State B and name that LLC as investment trustee and trust protector. Then, each of you and your sister will fill these roles by being named as managers of that LLC. The theory is that naming the LLC in that role is not equivalent to an individual in State A serving and may minimize the risks of State A asserting tax or legal jurisdiction over the trust.  While the result of this is not assured, it does illustrate the myriads of options you might have to try to accomplish your planning goals better.

Aging, Health, and Cognitive Challenges. Addressing the challenges of aging in more robust terms, as it may affect individual trustees and beneficiaries, has become more common. The realization that “incapacity” is not a light switch, and as health issues or aging progress, there may be a slow downward progression in capabilities, has become more commonly reflected in trust clauses. For example, given the expected incidence of chronic illness as the population ages, provisions providing that the named individual trustee will continue to serve through temporary periods of short-term incapacity may be useful. This could affect who you appoint as trustee or how those provisions are tailored. For example, if you are living with Parkinson’s disease (“PD”), you might be able to serve as the trustee of your revocable trust and, in that capacity, continue to be involved in managing your financial and legal affairs for decades to come. However, you might realize that you could use help or that you might need that help in the near term. So, you might name a co-trustee to serve with you and assist. That co-trustee might be a friend or family member, even if you chose to name an institutional trust company to serve as the sole trustee if you could no longer act as trustee. There are lots of choices, and they are not only critical to your plan but to your maintaining your independence for as long as possible.

Longevity brings increased cognitive and other health challenges.  providing a safe structure to protect against Alzheimer’s disease and other challenges of aging, identity theft, and other issues. These issues can be addressed by creating a safety plan with checks and balances to protect you or any aging beneficiary from elder financial abuse and other risks. There are many ways to address this, and often a combination of steps is advisable. One such step may be to mandate that the trustee hire an independent care manager to evaluate the elderly or infirm beneficiary and issue a written report to the trustee. While the trustee can do this at its own volition each year, in some instances, it can be drafted into the governing trust instrument. How does this affect your selection of people to appoint? The people you name as agents under your financial power of attorney, health proxy, and successor trustees under your revocable trust should be young enough (or the successors named after them should be) to be able to help you in future years. Also, you might consider naming two trustees or agents to work together to create a check and balance. If one person you named proves to be a bad actor who would take advantage of you financially, isn’t it less likely that two people would? Hopefully, the honest person you name will prevent the bad actor from harming you. You can name another person as a Trust Protector who has the power to fire and replace trustees. That way, if the bad trustee is identified the Trust Protector can remove them. Absent that safety mechanism, someone might have to go to court to remove a bad trustee, and that might never succeed and would be very costly and time-consuming.

The above example is really important. You may want simple documents, cheap internet documents (or go to the cheapest lawyer), and so on. That just doesn’t work to protect you. The above planning ideas are not reserved for wealthy people. Someone of more modest means really needs to protect that wealth if they are to be safe in their later years. 

Religion. Religious considerations can be integrated into your planning if that is your wish. Religious considerations could affect every legal document you have as part of your estate plan. If your attorney is not familiar with your beliefs and their impact, you may need to provide that information so that appropriate changes can be made. Given the potential that your religious affiliations may differ from those of fiduciaries you name and from current beneficiaries as family composition continues to evolve, how can this be addressed? This could include special trust protector or power of appointment provisions to address religious dispositive provisions. A trust protector is a person given specific powers to address trust or estate issues and is discussed in later sections of this paper.

Alternative dispute resolution mechanisms, such as arbitration of disputes, are more commonly integrated into trusts. This is not only a result of more humanistic planning, but it reflects the realities of longer-term trusts, which expand the periods over which issues can arise, and the evolution of the family unit to a less cohesive, more diverse structure.  For example, religious arbitration provisions are helpful in the context of resolving disputes of provisions based on religious law. But unless those to be bound consent by such provisions, courts may not uphold them. All of this might affect how your planning is structured and who you appoint to various positions. For example, you might want someone of the same faith, or at least is knowledgeable of your faith, to serve in some capacity to orchestrate all of this.

Personal Goals. You might have an important investment philosophy, such as investments that avoid stocks that harm the climate and favor those that help promote climate-friendly activities. That type of philosophy may have to be authorized expressly in all documents that deal with financial investment issues: power of attorney, revocable trust, irrevocable trust, and your will. Also, it may be advisable to have your investment manager create an investment policy statement (“IPS”) now and each year reflecting your wishes so that you make a record of what you want to be done from an investment perspective. If you write a letter of instruction to your heirs, it may be essential to explain your philosophy. Thus, your personal or philosophical goals can and perhaps should permeate all your planning and be coordinated to meet your wishes. Might these special goals influence who you select? Perhaps. Or alternatively, you might designate the person you believe has the most financial savvy and just take the steps discussed above to be certain that they are informed of your personal investment wishes.

Charity. For many people, giving back to charities and causes that were important to them is a vital part of their plan. This is not only planning for death but planning for life. For example, if you have tithed to charity during your lifetime, you might want that reflected in your planning. That will require you to coordinate from several perspectives. Your financial planner must know of this goal so it can be factored into financial forecasts. That is critical to meeting your current charitable goal as well as keeping your retirement and other financial goals on target. If tithing is important to you, then your durable power of attorney and/or revocable trust should permit charitable giving and provide a measure of direction as to how that should be done. If that is not done, then your lifelong goal of tithing could be disrupted in the event of disability. Are the agents you name under your financial power of attorney, and are the successor trustees under your revocable trust understanding these wishes? Are they appropriate to carry out your continued charitable giving? A common way to authorize the agent and successor trustee to gift to charity if you are incapacitated, is to state in the legal documents that the agent can make charitable donations “consistent with your history of giving.” Is that something the people you are considering naming are equipped to do? 

If charitable giving is so important to you, any irrevocable trusts should consider charitable giving and perhaps should include charitable beneficiaries so your heirs can continue your legacy of philanthropy. You might give some the power to add charities to your irrevocable trust to assure flexibility in future charitable giving. If so, then you will have to designate a person in your trust to do so. See the discussion of “Charitable Designator” below. 

Addiction and Other Challenges. If you have an heir who has an addiction issue, coordination of how you provide for that heir and otherwise assist them is critical. These challenging personal issues are too often covered up, which can prevent your advisers from telling you how to coordinate this planning. You might incorporate substance abuse provisions into trusts. If you have named an institutional trustee, they may not be comfortable applying those provisions, so you may have to name an individual to serve in that capacity. Who will you name? While there may not be a specific title for such a person, their appointment could be critical to your heir’s well-being. Your attorney must be informed of these issues to draft your documents addressing those points. Your financial adviser may need to understand the financial implications of this or other personal challenges to integrate the costs into financial forecasting. You might need to provide special instructions and powers in your financial power of attorney and revocable trust to assist such an heir. The people you appoint as agent and successor trustee in your financial power of attorney and revocable trust should be equipped to deal with this matter, and if not, other arrangements should be made. 

Tax Uncertainty. The tax system is incredibly uncertain. It will likely always remain in flux as each new administration elected to Congress and the Presidency tweak or wholesale change tax rules to accomplish fiscal and societal goals. The estate tax has been repealed and reinstated multiple times. Even if income tax rates are lowered, they may also be increased by a future administration. When trusts are drafted, infusing flexibility to address future income, estate, and other (e.g., a proposed capital gains tax on death) taxes is essential. Many newer fiduciary and non-fiduciary positions can be used creatively to accomplish this goal. For example, it might be useful for someone to be given limited power to appoint a trust principal to others. Someone might be given an express right or power to transform a limited power of appointment into a general power of appointment to cause estate inclusion. You might vest a Trust Protector with powers to defer funding successor trusts or defer when certain descendants might become beneficiaries to avoid negative tax implications. Which position should be given these powers? It might be possible to vest some or all such powers in the person you name to serve as Trust Protector. However, if the Trust Protector is designated as serving in a fiduciary capacity, it may not be optimal or even feasible for the Trust Protector to exercise these powers. A “fiduciary capacity” means the Trust Protector must act in the best interests of the trust beneficiaries. These include acting with regard to duties or obligations of care, loyalty, and good faith. Let’s say a tax proposal is enacted that would trigger a transfer tax (generation skipping tax or “GST”) whenever, say, a great-grandchild becomes a beneficiary of a trust. If the Trust Protector were given the power to defer when that great-grandchild could become a beneficiary, that might defer when a costly tax could be assessed on the entire trust. Although that might benefit your heirs overall, because the Trust Protector might owe a fiduciary duty to that great-grandchild, they may not be able to defer when they could become a beneficiary. Even if the Trust Protector were legally able to act, they may not be willing to do so out of fear of that great-grandchild (or a guardian acting on the great-grandchild’s behalf) suing them. You might need to designate a different person to hold these tax-sensitive powers who is expressly stated to serve in a non-fiduciary capacity so that they do not have the constraints that a fiduciary would in acting. Thus, you might need to designate two people to serve in two distinct trust protector roles. 

The above example shows how complex and intertwined the terms of your legal documents, the people you choose, and tax or other factors can be. Many people want “simple” planning, but life is rarely simple, and tax laws are almost never simple.

Complexity.  The modern trust is more flexible than the traditional trust. This results in more complex trust instruments and plans. The uncertainties and rate of change described above are reflected in trust documents that try to anticipate future tax law changes and provide different mechanisms to deal with those changes. State taxation of trusts is evolving. Society has grown more complex. Today, only about 20% of American family units consist of a traditional husband, wife and children from that marriage. All of this brings more complex goals to trust planning and more complicated provisions in trust instruments. The complexity makes it more important to create mechanisms to correct a trust that might prove less than optimal in the future. So, a modern trust is more likely to include a provision permitting the trustee to decant (merge) the trust into a new trust thus permitting the trust administrative, and other, provisions, to be improved if advisable. To make the decanting provision practical it might be helpful, if not essential, that a person has the authority to change trustees, situs and governing law for the trust. The significantly increased complexity of the modern trust might also suggest that including a trust protector and providing the protector the power to correct scrivener’s errors, might be useful.

Grantor Trust.  A grantor trust is a trust that the IRS ignores for income tax purposes so that you can transact business with the trust without any income tax consequences. However, the trust is respected, if done properly, for estate tax and asset protection purposes. This type of trust has been the foundation for much of estate planning for many years. Tax proposals, however, have suggested restricting or eliminating the benefits of this. However, looking at grantor trusts under current law, achieving the benefits this technique may afford might require you to name various people to special roles essential to that type of planning. 

The default approach for most irrevocable trusts is to be structured as grantor trusts for income tax purposes. The advantages of a grantor trust include that the trust’s income is taxed to you as the grantor (the person creating the trust). This status enables you to swap appreciated trust assets back into your so those assets can qualify for an increase in income tax basis on your death. Under the current estate tax system, this is a valuable estate planning goal. Even if you are not subject to estate tax, these concepts can provide asset protection and income tax advantages. Grantor trust status may permit you as the grantor to sell appreciated business, real estate, or other interests to the trust without triggering a capital gain. That may prove to be a key to transitioning your family business to the next generation without estate tax costs and protecting the business for those intended heirs. If you plan to transfer a family business or other special assets to the trust you will have to consider the implications to who you chose as trustee and investment trustee (a special trustee, or just a trust advisor) who can be named to manage trust investment decisions.

If you are not subject to the estate tax a grantor trust can be a powerful divorce or asset protection planning tool. If that is your goal you might benefit from naming someone who is independent, perhaps a trust company in a state that has favorable asset protection laws.

A common provision included in trusts to achieve grantor trust status is the power to substitute or swap assets. This provision requires a special trust position, sometimes referred to as the “substitutor,” for which you, as the settlor, must appoint a person to serve. The person setting up the trust is typically named, but that is not required. You could appoint another person, such as a sibling if you wish. Who should be named might depend on the nature of the trust, the assets in the trust, and the tax objectives of the trust. 

Directed Trusts.  Traditionally the trustee of a trust had control over all investment decisions. But you may have to name an institutional trustee to secure a site in a trust-friendly jurisdiction. For example, the settlor might have a long-term relationship with a particular investment advisor. You might want to take advantage of the laws of a more trust-friendly state, but you may still wish to continue the long-term relationship with your wealth advisor. Using a directed trust structure can permit you to have both the advantage of the better state law for the trust and continue the relationship by naming an institutional administrative trustee in the desired state and having the trust direct your long-time investment advisor to invest trust assets. These decisions will significantly impact the positions in the trust you have to fill and who you will name. They will also dictate the structure of the trust created for these purposes. If the institutional trustee is “directed” to follow the instructions of your investment advisor, the institution should have very limited or no liability for that investment and should, therefore, charge you a lower fee. 

Dynastic Trust.  Modern trusts are often planned so that the assets of the trust will remain outside the transfer tax system and protected within the trust for a very long time (as long as state law permits). Keeping assets inside flexible trusts for long or indefinitely may provide more safety and planning options as the tax system and other circumstances evolve. This long-term approach may require that the trust be formed in a state that permits trusts to last forever or at least a very long time. If your home state doesn’t permit that, you’ll have to have a sufficient connection (nexus) to a trust-friendly state that does permit very long-term trusts. That generally requires naming a trustee in that state. 

Quiet Trusts. As the name implies, a quiet trust is a trust whose existence may not be known to some of the beneficiaries. This might appeal to you for a variety of reasons. Example. You want to protect your assets from lawsuits or claims as you want to safeguard your wealth for your eventual retirement. Part of the plan to accomplish that is to transfer your assets to an irrevocable trust so that it will be protected. The trust is structured in a manner that will enable you to access trust assets, which should hopefully prevent your creditors from reaching the assets. For various reasons, your children are named as beneficiaries of the trust (along with naming you and your spouse in various ways not pertinent to this discussion).  While you trust your children, the assets in the trust you hope will be available to you in retirement if you need them. You would prefer not to inform your children about the existence of the trust to avoid them trying to get at the trust assets, which is not the plan’s primary goal. Can you simply choose not to tell the children about the trust? Not assuredly. Trustees, especially institutional trustees, are well aware of the advantages of beneficiaries being informed about the existence of a trust and the trust’s performance. By doing so, the trustee may be insulated from later claims by the beneficiaries about trust management.  Also, there is a potential benefit to all beneficiaries knowing about the trust. If the trustee mismanages it, the beneficiaries who have a direct financial interest in the trust’s proper care can object to the mismanagement, thereby safeguarding the trust. Can you accomplish all of these goals? Yes, but it will require the appointment of another person to a special trust position. 

Depending on state law, the terms of the trust instrument, and the parties’ preferences, it may be possible (even advisable) to designate a person to receive notice on behalf of one or more beneficiaries. This might reconcile some of the competing goals listed above by providing the protections of someone being responsible for being informed of trust matters but limiting disclosures to a beneficiary who may be harmed by the disclosures. If a beneficiary is incapacitated or has special needs, this structure might be valuable to incorporate into the instrument. The person designated to receive trust information on behalf of someone else might be referred to as a “designated representative” or by other titles. In other cases, this responsibility might be given to another fiduciary, e.g., the trust protector.

The above is yet another example of how your goals can influence both the structure of your plan (in this case, a trust) and, in turn, who you might need to appoint and what positions you need to fill.

Non-Reciprocal Trusts.  A common planning technique is for two spouses (or it could be siblings or others with a shared economic interest) might create trusts that benefit each other. Example: You create a trust to benefit your spouse and descendants, and your spouse makes a trust to benefit you and your descendants. You each give significant assets to the trust you create. In this way, a substantial portion of your wealth may be moved outside the estate tax system and into trusts that provide protection from creditors and claimants. If each of you is a physician, this could be a valuable approach to protect assets yet assure that you can still benefit from the assets (as a beneficiary of the trust created for you by your spouse).  But to accomplish these goals of protection, estate tax savings, and access, very deliberately planned steps will have to be taken, and each of those steps might result in new positions to which you have to designate people to serve for your plan to function. 

Example. For married couples concerned about asset protection (e.g., each spouse is a physician), using spousal lifetime access trusts (“SLATs”) may be a valuable planning tool (even if they don’t have tremendous wealth). For those with more significant wealth, and with the current high estate tax exemptions, longevity, and tax uncertainty, it is common for married couples to use SLATs rather than merely trust for children or other descendants. In this way, the couples in each situation can remain beneficiaries of trusts. However, the assets in those trusts are arguably outside their estate and secure from the reach of creditors. SLATs may be created by the husband creating a trust for the wife and descendants and the wife creating a trust for the husband and descendants. For SLATs to be effective, the trust instruments and plans should be sufficiently differentiated (there are no bright-line criteria of what that means). If the trusts are identical (e.g., all identical terms and merely different names), they may be disregarded under the “reciprocal trust doctrine.” The preferable approach is to draft each trust from scratch, incorporating meaningful legal, tax, and economic differences. Differences may include different fiduciary and non-fiduciary positions, persons named for positions that are the same in each trust, and so on. So, making a couple’s SLATs distinct from the other will significantly impact the positions and persons named in each trust. This might mean very different persons appointed in each of the two trusts. Consider:

• You might name different trustees and trust protectors in each trust to infuse independence.
• Each trust might be formed in a different state, and neither in your home state. That might require naming a different institutional trust company for each trust.
• One of the trusts, but not the other, might give someone a special power of appointment (the right to designate who may receive trust assets). You will have to designate a person with that authority in one of the trusts but not the other. Given that a power of appointment can be quite powerful, resulting potentially in the redirection or redistribution of all trust assets, that must be a person you trust to act appropriately.
• You might name different beneficiaries in each trust. While the primary beneficiaries of your trust might be your spouse and descendants, you might add an elderly aunt or other family member as a beneficiary. In your spouse’s trust, you and your descendants might be named as beneficiaries along with your spouse’s sibling.
• In your spouse’s trust, but not your trust, a person designated to act in a non-fiduciary capacity is given the authority to add charitable beneficiaries to the trust. That person will have to be named.

The key point is that whatever your goals and circumstances, carefully selecting people for the various positions that your estate plan might dictate can help you accomplish much more. The old-style approach of naming one person to serve as your executor and trustee might suffice in the simplest of situations, but for many people, that simplicity will undercut their achievement of important goals.