Trusts & Estates: Tackling 4 common topics

Thank you for taking a few minutes to listen to this audiocast. My name is Adam Clark and I’m the Global Head of Trusts & Estates at JP Morgan. Today I’m going to cover four common topics that I’ve seen families frequently ask about in my 25+ year career in Trusts & Estates.

First topic that is often discussed is how to build a sound estate plan? I hear people say that the fear of mortality is the biggest reason why people don’t engage in effective estate planning, but that’s not my experience. I think the two biggest challenges are the dread of going through the exercise and making some tough decisions about one’s family and legacy. Whilst also true that most people aren’t too excited about writing a check to attorneys to draft the documents, most families would happily pay the fees if the finished estate plan miraculously appeared in their inbox. It can be intimidating to find and engage the right attorney, enter the complex world of trusts and estates, review pages and pages of draft documents and to decide how to distribute assets to your descendants. Most clients want to leave assets to their children and grandchildren but are terrified of spoiling them and disincentivizing them. Paralysis of making a bad decision is usually worse than doing nothing. Many estate plans can be changed or completely revoked and restarted, so don’t get too focused on making it perfect. There is no such thing as a perfect estate plan.

I think the best way to start creating an estate plan is to bite off small pieces at a time. It’s not unusual for some of our larger families, over time, to have dozens of trusts for different purposes, such as charity, children, grandchildren as well as trusts for different strategies, such as mitigating estate tax exposure, or protection from creditors. The number of trusts can also accumulate over time as one’s balance sheet, family dynamics and outlook changes. It will become too overwhelming to undertake a lifetime of estate planning in one go, so start small with a will and revocable trust. If you have a young family make sure guardians are appointed (and make sure you tell them!). You can build over time, adding complexity and incorporating tax planning strategies, but biting off too much too soon will put you off finishing anything. Choosing the right attorney is also important. He or she obviously needs to be a competent estate planning attorney, but also make sure you connect well. If you build a good relationship with your attorney, you’re more likely to go back and enhance the plan over time.

The second topic is that beneficiaries are frustrated with their existing trustee and the distribution process is cumbersome. A trustee’s duty requires him or her to objectively follow the terms of the trust. That could include making mandatory distributions, for example if the trust requires all income to be paid to Sally annually, or $1m to be paid to Doris on her 30th birthday. More common is the discretionary decision to make distributions, where the trustee must balance the terms of the trust with the desires of the beneficiary making the ask, along with the duty to future beneficiaries who might not even be born yet. It’s a delicate balance and needs to be consistent, process-driven and be well documented. Where I see trustees getting themselves into trouble is when they listen to the loudest voice but forget their duty to other beneficiaries. When choosing a trustee, it’s important to understand what their process looks like. What information will they ask from the beneficiary, how quickly can they make a decision, how many people are in the decision making, how do they maintain consistency and avoid playing favorites, and do they have a dreaded committee that meets only monthly with approved and denied stamps. But the beneficiary also has to play his or her part. The trustee might require information from the beneficiary in order to make the right decision. A trust is not an ATM machine, so when the trustee asks for information it’s likely so they can perform their duties and not because they’re looking for reasons to deny distributions.

In addition, clients often also wonder if their trust is invested in the best way. I’m fortunate to carry out our trustee duties in a large financial institution with talented investment professionals, which certainly makes my job easier. Even the best investors would struggle to invest trust assets without really understanding the terms of the trust, its purpose, duration, and the needs of the beneficiary. By default, a trustee is held to a high standard of prudent investing. That usually means avoiding concentrations, diversifying assets, and thinking about both current and future beneficiaries. Families often create wealth with large, concentrated interests that have significantly increased in value. A trustee’s role is not to replicate that with trust assets; it’s to preserve it and grow it reasonably for the needs of the beneficiaries. A family that became wealthy in manufacturing widgets might be comfortable with 90% of their net worth being in widget factories, but a prudent trustee should not. Investing for trusts also requires a fundamental question of whom am I investing for. If a trust has an eternal duration, such as modern dynasty trusts, the trustee needs to think way beyond the current beneficiaries. That might mean that taking more risk is appropriate than for a trust that needs to cover education cost for beneficiaries currently in their early teens.

Lastly, you should consider if you have outgrown your current situation. I don’t have an Uncle Joe, but I often reference a proverbial Uncle Joe to represent a smart family member who acts with integrity and understands your values. Uncle Joe might be a great fit as a trustee in some cases. The same can be said for small, regional corporate trust companies. As you and your family’s lives get more complex, however, it’s possible that you outgrow Uncle Joe’s capacity or comfort zone. Does he really want the fiduciary risk, can he handle complex legal and tax issues, produce trust accountings, manage the trust assets, objectively decide on distributions and build a framework for recording and tracking decision making. With the best will in the world, that’s a lot for Uncle Joe. Especially if he has a day job and his own family. Even if Uncle Joe takes all of this responsibility without charging a fee, he might need to hire accountants, attorneys, investment managers which adds up to more than the fees for a corporate trustee who undertake all of these duties. Let’s say Uncle Joe doesn’t do a stellar job, despite the best intentions. Do you want your children to sue him and go after his personal assets? Choosing the right trustee is about relationships, but it’s also about choosing a trustee with the right resources, experience and commitment to carry out your estate plan effectively.

Thank you very much for listening. I hope you found this helpful. We’d welcome the opportunity to discuss how JP Morgan might be helpful in a trustee or executor capacity for your estate plan.