by Michael Ettinger, Esq.
Recently, a couple came in to see me. They were people of means, having accumulated an estate in excess of two million dollars. Sadly, the husband, a fine gentleman, had contracted an incurable form of cancer. They knew it was time for a review of their estate planning documents.
The couple had two sons, both in their fifties. One was an established professional, the other a successful entrepreneur.
The client produced their current will, written nine years earlier. Since their estate was over one million dollars, the will contained a “credit-shelter” or “bypass” trust. This means that, upon the death of the first spouse, the deceased spouse’s assets would be held in a trust for the surviving spouse. This technique allows the surviving spouse to have the use and enjoyment of those assets without having them includable in her estate. On her death, husband’s assets pass to the children, thus taking advantage of his one million dollar exemption.
I read the trust. The I read it again. I could not believe what I was reading. The will set up the credit shelter trust for the wife, with the Bank as trustee. This technique is sometimes used by attorneys to ingratiate themselves with the Bank. It is often not in the best interests of the client, since one or both of the sons could have been chosen as trustee thus saving the Bank’s fees of approximately 1% of the trust annually, plus other fees as will be shown below.
But that was not the unusual part. The will also set up trusts for the sons, with the Bank as trustees FOR THEIR LIFETIMES, giving the Bank the following authority:
“The Trustee is granted the further absolute discretion to determine when, how, and whether to make any distribution of principal, the amount to be distributed, the specific purpose for making any distribution, and whether any distribution is advisable.”
The Bank was also given authority to collect its fees as trustee “without offset or reduction for any other fees or other compensation paid to it or any other “affiliated entity” including fees or other compensation paid by any mutual fund or other investment vehicle agent. “Such compensation may be made without court approval.” This means that the Bank, in control of the assets, would also collect fees as the investment advisor, effectively a “double-dip” and specifically excludes court scrutiny of the arrangement. There was no provision to change the trustee.
So, what happened under the trusts for the sons when they died. The assets were then put into trusts for the grandchildren with the Bank as trustee all over again! The Bank was also given control of the assets over the grandchildren’s lifetimes with the following “suggestion”:
“The Trustee may consider distributing: one fifth (1/5) of the trust estate upon the grandchild’s attaining the age of thirty (30) years; three-eighths (3/8) of the trust estate upon attaining the age of thirty-five (35) years; and the balance of the trust estate upon the grandchild’s attaining the age of forty (40) years. Nothing set forth herein shall be construed as providing a grandchild with the authority to require any distribution to be made from the trust at such ages” (emphasis added).
The client was appalled. They had no idea whatsoever these draconian provisions were in their documents. In our experience, most people do not know or understand what is in their estate planning documents.
Given the circumstances of the husband’s health, within the week we had replaced all of the documents with trusts controlled by the family alone, much to their relief. There was a great deal of satisfaction on their part knowing that had the husband died without having the plan reviewed, they would have been stuck with the Bank, irrevocably, forever. All’s well that ends well.