Estate Planning Trusts and a Letter of Instruction: photo of a hand holding a pen signing a legal document

Use of Letter of Instruction in Estate Planning Trusts

What You Need to Know About Estate Planning Trusts: It is a very common estate planning technique to create trusts for beneficiaries. A trust is simply a legal entity which may hold title to the inherited assets. A trustee is appointed to manage the assets. There are several options as to whom may serve as a trustee. Sometimes it is a family member; sometimes it is a corporate trustee, and sometimes it is the beneficiary himself.   The choice of the trustee depends on the purpose of the trust.

For younger beneficiaries, for beneficiaries who are not expected to be good money managers, or for beneficiaries with behavioral or substance abuse problems, a third-party trustee should always be chosen. If the use of a trust is simply to provide a creditor protected inheritance, the beneficiary himself may be designated as trustee. This article will discuss the administration of trusts when a third party is selected as trustee.

A trust for a beneficiary is generally directed to be created upon the death of the trustor or will creator. The inherited assets are held in a trust, which obtains a tax identification number, and then held by the trustee for the beneficiary’s benefit. The trustee is then given discretionary powers to take care of the beneficiary’s needs through what is known as “HEMS” standards.   HEMS stands for health, education, maintenance and support.

It is unusual for a trust document to go into great detail in defining the discretion or assisting the trustee in interpreting the trust creator’s goals. The trustee must deal with a number of potential contingencies, depending on the age, health, and wealth of the beneficiary. For example, does education include trade schools, postgraduate, night courses, etc.? Does the health standard include the payment of medical insurance premiums? Does support include buying a car, paying for a house, starting a business? While all of these are within the range of a trustee’s potential decision-making, very few trusts provide guidance in these areas.

For this reason, we always include a provision in our trust documents telling the trustee to rely on any separate letter of instruction that may be left by the trust creator giving the trustee more detail about the trust creator’s goals and the realm of the trustee’s discretion. For example, the trust creator may go into more detail about educational goals, what is anticipated for the beneficiary, and what may be out of the realm of expectation. By way of support, the trust creator may expound on such areas as the purchase of vehicles, assistance in buying a home, assistance with the cost of a wedding, and so forth.   I have seen letters of instruction telling the trustee not to spend a great deal of money on a vehicle, telling the trustee to encourage the beneficiary to travel the world, telling the trustee to spend lavishly on a wedding, and so forth.   The more detail that is stated in the letter of instruction, the better the trustee will be able to manage the trust and to exercise the broad range of discretion given to her. Moreover, when there are disputes between the trustee and a beneficiary, or the beneficiary is unhappy with the trustee’s distribution actions, the letter of instruction may be relied upon to support the trustee’s actions.

In summary, although it is generally not possible to include all of the trust creator’s goals and aspirations in a trust document, it is certainly possible for the trust creator to express all of his or her goals and aspirations for the beneficiary that are relevant to a trustee’s potential decision-making.  I strongly suggest that anyone who has created an estate plan with trusts for beneficiaries consider all of the spending options that would be available to a trustee and put your wishes and thoughts into a letter of instruction.

NOTE:  For Silverman Law’s clients, you will find this letter of instruction behind the Introduction & Important Instructions tab in your estate planning trusts binder.  It is titled “Your Personal Wishes Letter.”  Have you filled it out?  If not, we recommend that you do so!

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