Art or Science?

 “Calvin” visited with me recently, armed with spreadsheets describing the distributions he wanted his revocable trust to implement following his death. He made various assumptions about his investment’s expected rate of return, the amount of money and assets his surviving spouse would require to maintain her current standard of living, the years of his and her deaths, and how the trusts would later distribute to his children and grandchildren. The whole package was quite impressive. 

I complemented Calvin on the time and good work he expended to show me how he wanted his plan drafted to satisfy his intent. Calvin explained that during his career he successfully adhered to budgets and projections, so he was simply applying those skills to his personal life in his effort to ensure his loved ones would be well taken care of. 

As we proceeded to discuss what he wanted me to draft into his trust, Calvin dictated some fairly detailed and restrictive provisions. I advised that those provisions would work well, provided that all of the assumptions he made in his spreadsheets came true. Then I asked, “How confident are you that all of those assumptions will turn out to be accurate?” 

“I’m fairly certain,” he said with a raised brow, “since I usually hit the nail on the head in my corporate career.” 

“So you’re telling me,” I continued, “that you are fairly certain you are going to die seven years from now, that your wife will outlive you by eight years, and that during that time period your investments will earn a constant 6% with no fluctuations?” 

“Well, when you put it that way,” he answered, “but I do think it will come close to that.”  

That’s when I gave Calvin my “estate planning is more of an art than a science” talk.  

We all know that life is unpredictable. If it weren’t, all of us would be millionaires rather easily. Tax laws that are affected by politics play a role in future outcomes. Investment markets and real estate have boom and bust cycles that no one can accurately predict. Our lives and the lives of our children and grandchildren take unexpected twists and turns. 

Therefore it is usually prudent to have an estate plan that can be flexible. This seems counterintuitive when you realize that most wills or revocable trusts become irrevocable upon the grantor’s death. But trusts can include broad discretionary powers to trustees to make decisions related to distributions, investments and a variety of other topics. While some people cringe at the thought of allowing a trustee to have such control over a beneficiary, consider that the beneficiary herself can be named as her own trustee following the grantor’s death. 

An example of this would include a testamentary trust created for a daughter. The trust states that the daughter can distribute income or trust principal to herself for health, maintenance, support and educational purposes (very broad terms allowing for a lot of discretion), or the trustee can choose to make distributions to the daughter’s descendants for the same purposes. So if the daughter would like to distribute some of the income or principal to her child who is attending college, she is free to do so. She may also choose to not distribute income, and allow it to accumulate for her retirement, compounding the earnings over several years. 

Another way to make what would otherwise be irrevocable trusts amendable after the grantor’s death is to include something known as a “power of appointment.” A grantor could grant his son the power to appoint the income and principal left in the son’s share of the trust upon his death to a selected class of beneficiaries. 

This example would look something like this:  “My son shall have the testamentary power to appoint the undistributed and accumulated income and remaining principal in his trust share upon his death to his spouse, descendants and charity in such manner or proportion as he may select.” This allows the grantor’s son to change what would have otherwise been an irrevocable trust. Why is this important? The son can consider the relative economic need of his family members, can divert assets from someone who might be a spendthrift, and can protect assets from the reaches of estate taxes to name just a few benefits. 

Having this flexibility typically throws the spreadsheet calculations out the window. But isn’t it better to have some ambiguity and flexibility as opposed to a deliberate outcome that might not be consistent with changing tax laws, investments and family circumstances? Food for thought. 

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