How the good intentions in estate planning can go sideways

One of the most attractive features of a trust is that it allows you to structure your estate plan to ensure your assets are distributed according to your wishes.

Creating a trust can be a satisfying experience, knowing that you are taking steps to provide for your loved ones and favorite causes while preserving your hard-earned assets even after you are gone.

It is admirable to want to preserve your legacy, but sometimes how you go about it can end up causing more harm than good. As with any complex legal instrument, potential pitfalls can arise when drafting your estate plan and trust, even with the best intentions.

I am not a trust attorney, but as a professional trustee who has settled hundreds of trusts over more than two decades, I have seen how estate plans can lead to costly and complicated trust administrations and litigation between family members when the grantors (the creators of the trusts) try to control too much from the grave.

I am not my brother’s (or sister’s) keeper

Appointing one child as the successor trustee of a trust to distribute funds to another child can create a situation that is unfair to both children and often leads them to probate court.

The child appointed as the trustee may feel burdened with managing and distributing funds to their sibling, leading to resentment. If they make poor financial decisions, both children can be negatively impacted.

The non-trustee child may feel they are being mistreated and that their financial well-being is at the mercy of their sibling. I once witnessed an argument between two brothers, one the trustee and the other a beneficiary, that devolved into them fighting like little kids over who was mom’s favorite. They were in their fifties.

I don’t want to work for my sibling

A common saying in the charitable gift-planning community is that if you want your children to fight, leave them a foundation to operate together.

Parents often believe that leaving a foundation or business for their children to run will help keep them close by providing a shared sense of purpose. They may also think that leaving a business will provide their kids with financial security and protect them from the uncertainty of working for someone else. Some parents may also view passing down a business or foundation as a way to preserve all they have built and ensure their values and contributions are continued and recognized by future generations.

When multiple siblings are forced to work together, strategy, priorities, and leadership disagreements can arise, leading to conflict and legal battles. Watching adult children quarrel over business decisions can resemble young kids fighting in the backseat of a car on a road trip. Often it has nothing to do with what is best for the business.

Also, not everyone has the skills or personality to run a business. As a result, parents may inadvertently limit opportunities for some of their kids to pursue their distinctive talents and other career prospects.

The heirs who take on leadership roles may become bullies or experience significant pressure and resentment, leading to burnout and health problems.

Occasionally, a company is forced to use precious resources to support unproductive family members, who are sometimes just glorified check signers. The alternative, leaving the company to some children but not others, can create resentment and feelings of unfairness.

Not worth the effort

Sometimes, controlling from the grave can go to the extreme. One grandmother designed her trust to maintain the family’s high social status, to foster an ongoing relationship and networking between her grandchildren, and to encourage her progeny to become educated professionals.

Beneficiaries were required to attend frequent family gatherings to receive their quarterly distributions. They were not paid for that quarter if they arrived late, were not appropriately dressed and groomed, or did not show adequate manners. If they did not live in a good neighborhood, obtain high enough grades, or date someone the trustee thought was appropriate, their distributions were cut.

It was sad to see how much the grandchildren hated those dinners, how unhealthy competition was created between the cousins, and how these young adults had to pay for expensive apartments, clothing, and cars to meet the grandmother’s post-mortem expectations.

Complicated trusts, like spendthrift and dynasty trusts, are typically designed to achieve specific goals, such as providing for educational expenses, minimizing taxes, or protecting beneficiaries from creditors. However, in many cases, the complexity and duration of the trust can lead to unintended consequences that ultimately undermine the trust’s effectiveness. Often, assets are insufficient to cover the costs of administering the trust.

The solution

As a trustee who has often seen the unpleasant consequences of good intentions, I advise working with a qualified trust attorney to draft your trust. Avoid lawyers who use boilerplate, fill-in-the-blank software and who offer one-size-fits-all living trusts at a discounted rate.

By working with experienced and licensed professionals and taking a thoughtful, pragmatic approach, you can create an estate plan that benefits your intended beneficiaries over the long term.

Your attorney should be able to provide alternatives to one sibling being the trustee for another sibling, including using annuities and other financial/gift planning vehicles or hiring a trust protector.

If you own a business, your attorney and CPA should advise you about succession planning long before you plan on retiring. As part of your succession plan, they should propose changes in your corporate structure and bylaws in addition to drafting your trust. The cost of hiring succession planning experts will often be mitigated with tax savings.

Visualize the execution of your estate plan and how it will work without your direction. Is it too complicated, or will it take too long to settle? If you want more control over how the funds you leave your heirs are spent, perhaps plan on giving it away now while you are still here. Talk to your attorney and CPA about how you can positively impact your family and community and enjoy seeing the results.

Andrew Carnegie once said, “It is more difficult to give money away intelligently than to earn it in the first place.” I am not sure if that is entirely correct. Yet, by being conscious of the implications of your planning, you can create a trust that reflects your vision, safeguards your legacy, and ensures a smooth and efficient distribution of your assets to your loved ones.

Michelle C. Herting specializes in succession planning, business valuations, and settling trusts.