Using Family Trusts (CONT’D FROM PAGE 30)
say ‘no’ to the beneficiaries. The balancing act is to pro- vide enough flexibility without giving so much freedom that the trust becomes a sham.” Discretionary Payments As the above comments suggest, trusts need to recog- nize the possibility of future surprises. That’s why the trend today is toward the use of “Discretionary Trusts,” irrevoca- ble trusts which do not specify a set amount of income for beneficiaries but allow for trustee discretion. Sampson says that many business owners tell the trust- ees something like this: “I want my kids to be educated, and I don’t want them living in a van because they encoun- ter a health problem. But I do not want the money used for lifestyle enhancement.” Such terms may be included in the trust itself or in a side letter addressed to the trustee. Discretionary trusts offer considerable protection from creditors and lawsuits. That’s because the law says a cred- itor can only access the assets of an irrevocable trust to the same extent as the beneficiary. So if the beneficiary cannot get at the money in the trust to pay a business ex- pense without the permission of the trustee, neither can a creditor. Discretionary trusts also free the trustee to invest for the highest total return without needing to worry about meeting arbitrary mandated payouts. So, for example, the trustee may decide to invest more money in a broad bas- ket of stocks and bonds rather than only in lower-yield-
child becoming a “trust baby” and slacking off instead of working. So to inspire a work ethic in his son Jerry, Mark established a trust that would provide distributions to match his son’s earned income each year. However, Mark’s attorney encouraged the inclusion of a provision allowing additional distributions in the trustee’s discretion, just to provide flexibility. One day Jerry was driving home on a motorcycle when a serious accident left him unable to ever work again. If it were not for the provision allowing discretionary distri- butions beyond the amount of Jerry’s earned income, the trust assets would not have been available to provide the money required for his medical attendant. That story carries a moral. “Don’t try to design for a sce- nario that is too specific,” advises Sampson. “It’s a good idea to include a provision that the trustee can make distri- butions of income and principal in the trustee’s discretion just in case something unanticipated happens.” Sampson also suggests another point of flexibility: the ability to change a trustee who is uncommunicative or too tight with distributions. “There should be a way to replace the trustee,” he says. “You can even give that power to beneficiaries as long as the new trustee is truly indepen- dent. The replacement should not be an employee of one of the beneficiaries, for example, or a relative. The flip side is that the trustee must be strong enough to sometimes
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