“It turns out your friend is only mostly dead.”
In the 1987 fairly tale adventure movie, Princess Bride, Billy Crystal plays Miracle Max, an unemployed magician who is able to concoct a magic potion in order to return Wesley, the movie’s protagonist, to life again. Wesley’s friends had brought Wesley’s body to Miracle Max after Wesley had been tortured to death by the evil Prince Humperdink. Upon arrival, Miracle Max tells the friends that Wesley was only “mostly dead” and not “all dead.” “If it turns out your friend is all dead,” Miracle Max explains, “there is only one thing you can do, which is to go through his pockets and look for loose change.” Like all good fairy tales, Miracle Max is able to concoct the magic potion, bring the “mostly dead” Wesley back to life, and Wesley and his friends have fun storming the castle to save the Princess Bride from Prince Humperdink.
In the course of estate planning discussions, some of our clients might tell us that they do not wish to “rule from the grave” or exercise a so-called “dead hand.” When they are “all dead,” they might not wish to act like they are only “mostly dead” by directing children or other beneficiaries as to how their remaining assets should be managed. While I certainly appreciate the desire to provide adult beneficiaries assets without limitations, there could be tremendous advantages to creating on ongoing trust structure (what I call a “testamentary trust”) for the benefit of a child, grandchild or other beneficiary.
Discretionary Distributions
In addition to protecting an inheritance from a beneficiary’s bad financial decisions, a divorcing spouse or creditors, a trust can be structured to provide a trustee with the necessary discretionary authority to make distributions for certain purposes. Here are a few common trust distribution standards entailing a trustee’s discretion that you and your clients might consider:
- Ascertainable Standard. The most common standard I use on behalf of my clients is the “ascertainable standard” of making distributions for a beneficiary’s “health, education, maintenance and support.”
- “Health” generally encompasses all medical and dental expenses, physical or mental therapy, and pharmaceutical costs. It may take the form of paying insurance premiums, deductibles, or direct costs not covered by insurance.
- “Education” refers both to the payment of tuition (including primary education, secondary education, trade or technical programs, but not graduate school) as well as room and board.
- “Maintenance and Support” refers to distributions to assist the beneficiary in maintaining his or her standard of living.
- Additional Needs-Based Discretionary Distributions: A Trustee might also be permitted to make discretionary distributions for certain other specified purposes, including:
- assisting the child or grandchild to attend graduate school;
- assisting with the costs associated with a first wedding;
- entering into or maintaining a business or profession;
- assisting with the costs associated with the purchase of a home;
- allowing the child or grandchild to make charitable gifts directly to tax-exempt organizations; or
- allowing the child or grandchild to participate in work projects, missions, or other non-profit work, such as famine or hunger relief.
- Purely Discretionary Distributions. A Trustee might be authorized to make distributions to a beneficiary for any reason in the Trustee’s sole and absolute discretion. This standard is by far the most deferential to the name Trustee. I rarely see this standard, and recommend it only when a client wishes to provide complete protection to a named trustee. If you have seen the Princes Bride movie, you would agree that naming someone possessing the attributes of Miracle Max would not be a good idea where a purely discretionary standard is involved.
Directed Distributions
In contrast to discretionary distributions, a testamentary trust can be structured so that the trustee is required or directed by the trust creator to make distributions upon the occurrence of certain events outside of the discretion of the trustee. Here are a few examples:
- Incentive Distributions: In an attempt to incent a beneficiary towards gainful employment, some clients direct that trust distributions be made only to match a beneficiary’s W-2 wage income from the previous year, or direct that a gift be made to the beneficiary with certain achievements, such as obtaining a college degree.
- Age-Based or Date-Based Distributions: Especially in situations where clients create testamentary trusts by reason of the youth of the individual, clients direct that the beneficiary is to receive some or all of the inheritance upon reaching certain ages, or at certain dates. Some clients create a trust to last until a child or grandchild reaches age 35 or 40. Some clients also create a structure in which a beneficiary receives equal distributions over a 10, 15 or 20 year time period.
As with other elements of a comprehensive estate plan, the appropriate provisions for a particular client will depend not only upon their assets, but also the needs of the specified beneficiaries. We regularly engage clients in the conversation of whether or not they should act only “mostly dead” by creating a testamentary trust and, if so, how that trust should be structured.