DRAFTING FOR SPECIAL CIRCUMSTANCES

Rhonda H. Brink Law Offices of Rhonda H. Brink 3400 Northland Drive Austin, Texas 78731 (512) 454-8400 (512) 454-2055 (Fax) [email protected]

11TH ADVANCED DRAFTING: AND COURSE 2000

Houston, Texas October 26-27, 2000

16-B © Rhonda H. Brink, 2000

BIOGRAPHICAL INFORMATION

Education:

B.A. in Economics with High Honors, Trinity University, San Antonio, Texas J.D., The University of Texas School of Law, Austin, Texas

Professional Activities:

Admitted to bar, 1974, Texas Former supervising shareholder of the estate and trust section of Clark, Thomas & Winters, a Professional Corporation, Austin, Texas; Board Certified in Estate Planning and Probate Law; Fellow of the American College of Trust and Estate Counsel; Past President of both the Central Texas Estate Planning Council and Volunteer Legal Services of Central Texas (formerly Austin Lawyer's Care); Past Chair and present Board Member of the Council of the Travis Bar Association Estate Planning and Probate Section; Author of numerous articles prepared for State Bar of Texas CLE Programs in Estate Planning and Probate Law; Director of the Texas Professional Development Program 1990 Advanced Estate Planning and Probate Course; Director of the Texas Professional Program 1999 Advanced Estate Planning Strategies (San Francisco); Lectured frequently in her field of expertise for such State Bar programs, as well as for ALI-ABA Seminars and video presentations; Served on the faculty of the University of Miami Philip E. Heckerling Institute on Estate Planning (1988 and 1991); Listed in the Best Lawyers of America since 1995; Member of the Philanthropic Advisers Network of the Council on Foundations (1997); and Member of the University of Texas Planned Giving Advisory Counsel (1999-2001).

Personal:

Born Galveston, Texas, October 2, 1950; Husband, Robert L. Green, Jr.; Children, Lynn Green (13) and Leslie Green (8); Deacon, Covenant Presbyterian Church, Austin, Texas. Drafting for Special Circumstances 16-B-i

TABLE OF CONTENTS

I. INTRODUCTION ...... 1

II. SCOPE OF ARTICLE ...... 1

III. THE CHOICE OF FIDUCIARY ...... 2 A. The Individual ...... 2 B. The Corporation ...... 2

IV. THE MORAL (NOT ETHICAL) DILEMMA ...... 3 A. Secrecy ...... 3 B. Selection and Training of ...... 3

V. ADMINISTRATIVE AIDS ...... 4 A. Determining Existence of Conditions ...... 4 1. DETERMINATION BY THIRD PARTY ...... 4 2. CONFLICT RESOLUTION ...... 4 B. Trustee Incentives ...... 5 1. OUTSIDE PROFESSIONALS ...... 5 2. GRANTING A “POWER” TO PRESERVE FLEXIBILITY AND DECREASE LIABILITY ...... 5 3. THE FAMILY OFFICE ...... 6 4. FINANCIAL TRAINING ...... 6

IV. SUMMARY ...... 6 Drafting for Special Circumstances 16-B-1

Drafting for Special Circumstances

... act in ways I approve of

... as long as you do well in school

... if you are a stay at home mom

... reward charitable work or participation

... if you are successful on your own

... if you are in treatment

... adherence to family philosophies

... doing something to the best of your ability

... business achievement, academic excellence and social contribution

... be a productive member of the family

... don’t be a bum1

I. INTRODUCTION it the parenting the parents never accomplished? In a classic Bugs Bunny cartoon, Elmer If the parents’ success, achievement and Fudd’s uncle sends Elmer a telegram advising that adherence to good values in parenting were to be the uncle will leave to Elmer a $3,000,000.00 the standard against which the parents’ worth were inheritance, on the condition that Elmer not harm determined, there would not be much money to any animals, especially rabbits. So Bugs moves worry about leaving to the kids. into Elmer’s house. Elmer is kind to Bugs. Elmer gets the money. Then he kicks Bugs out of the II. SCOPE OF ARTICLE house.2 This topic, too, is a little comedic. The author will introduce her concerns What has been dubbed “financial about the current trend of “incentive trust” drafting parenting,” the use of “incentive” standards in and speculate on several administrative trusts, should drive fear into the heart of any considerations that suggest additional drafting fiduciary. What a term, “financial parenting”. Is concepts. Due to the author’s inherent distaste for Drafting for Special Circumstances 16-B-2 the newly popular “incentive trusts”, this will focus picture, is there? more on incentives for fiduciaries than incentives Or what about the unrelated individual for beneficiaries. This, because most experienced fiduciary? The author won’t even go there - out of estate and trust attorneys accept this premise: any respect for her enormous prejudice against estate plan is only as good as the fiduciary who unrelated fiduciaries. Yes, I believe that blood - no administers it. matter how weak- is thicker than water. Or the melt down - how do we define an unrelated III. THE CHOICE OF FIDUCIARY fiduciary’s continued relationship with our children The chosen fiduciary will likely be a as a condition to the unrelated individual’s family member or a corporate fiduciary (bank or continued service as fiduciary. Perhaps the ultimate trust company). Since it is the primary “carrot” for the unrelated relationship not to end is beneficiaries upon whom these incentive “carrots the fiduciary fee. That is a pitifully poor reason to and sticks” are being imposed, we can exclude think that a unrelated individual will stick around them from the list of potential fiduciaries, least the for the duration of the children’s trusts; probably fox guard the hen house. That would leave one that would shock the high-minded philosophy collateral heirs or trust departments as the only of the client, if he were to think about it. likely choices. B. The Corporation And the stark reality is that, absent Enter the corporate fiduciary, a natural creative artificial intelligence engineering, there is choice for this newly wealthy client whose family only one real choice as fiduciary of any plan -- an may be excluded for reasons discussed above. individual. Whether or not a corporate fiduciary is Here is the premise and the question: it used, the ultimate decision to distribute or not to took approximately ten years, in the author’s distribute (and that is the question!) will be made experience, for corporate to accept the by a human being, one whose thought process is concept of serving as trustees of private shaped by the same social, economic and “unitrusts”. (This, despite the fact that that type of psychological influences that are being set up as trust offered real protection to the trustee against standards in these “incentive trusts”. claims and liability for discretionary distribution A. The Individual decisions and the fact that corporate fiduciaries Ah yes, Uncle Bill or Aunt Monica, or were accustomed to administering such unitrusts in maybe cousin Adolf. (As a corollary - are these the charitable arena.) How long will it take for the same collateral relatives with whom the minor corporate fiduciaries to accept the responsibility of children will reside after they are orphaned?) Have administering private trusts that are replete with you noticed how often it is that only one of an liability and impose parenting responsibilities? Is entire family group hits the big one? Particularly there a belief that a corporate trustee, acting among the “nouveau wealthy” (the “dot commies”), through the collective wisdom of its individual who seem to be disproportionately attracted to trust officers, will be in a position to carry out the these incentive plans and are the most prospected philosophical directions of the now deceased incentive trust clients, estate plans often spread the parents? The corporate trustee must be brought wealth among otherwise financially unsuccessful into the discussion about the use of incentive trusts. collateral heirs. However, it is questionable whether involving the So we ask Uncle Bill, a salaried mid- level potential fiduciary into the discussion at the manager, who lives pay check to pay check, with planning stage will have much staying power. Will increasing concerns about mortgage payments on the allure of the high wealth client entice the trust his house (including the home equity loan he took officer to play the game during the lifetime of the to cure the last bout of “plastic fever”) to be the client only to bail out once the frying pan heats up faucet for millions, if not billions, of dollars of after the “incentor” dies? Will higher fees be wealth. No likelihood of dysfunction in this imposed for accepting these types of trusts? What Drafting for Special Circumstances 16-B-3 new systems will be developed to make the the completion of an appropriate number of decisions required of the incentive trustee? consecutive years of serving as Co-Trustee, the child could be permitted, at any time, or from time IV. THE MORAL (NOT ETHICAL) to time, to remove the other Co-Trustee and begin DILEMMA serving as sole Trustee. Ethical concerns of estate planners are B. Selection and Training of Trustee often addressed. At the risk of going even further In an article that this author would have out on the limb, the author would highlight, not the just as soon have plagiarized (instead of writing her professional ethics, but the moral issues presented own thoughts), the heart of the problem in by incentive drafting. I suggest that the client who administering incentive trusts is made apparent: peddles off the job of proper rearing of children to a fiduciary might be a prime candidate for a little Unfortunately for many trustees, they are “reality check”. Would it be wrong to suggest that, not introduced to their new partner, the rather than to lay the decisions concerning how the beneficiary, until the “wedding night,” children (or other descendants) develop off on the (following the signing of the trust back of an ill-equipped fiduciary, that the parents agreement by the trust’s Grantor or on his take an active, current role in teaching and training or her death) and at this point a new the children in matters of social responsibility, relationship has to be formed. financial acumen and good conduct? Unfortunately, for most of these new A. Secrecy beneficiary/trustee relationships rarely do We learn that some of the “incentors” the parties understand that the human acknowledge that the topic is so prickly they don’t relationship they are entering will be far even want to broach the subject with their children. more important to the trust’s success than They get the lawyers to deliver the details of the the proper maintenance of their legal incentive package, or wait for it to be a surprise relationship. How quickly the trustee and after they’re gone.”3 beneficiary come to grips with this truth Admitting that it will not necessarily work and begin to manage this human with minor children of tender age, for the vast relationship will have a profound impact majority of children, involvement in the financial on how beneficial the trust will prove to be aspects of wealth management would seem to be a for both parties.4 more desirable option than secrecy, or what might more appropriately be called “punting.” There is The author of the forgoing excerpt, James a tremendous benefit to involving the children, E. Hughes, Jr., has done a brilliant job of especially when to do so gives the parents the suggesting how the relationship of the trustee and opportunity to preview the children’s capacity to the beneficiary needs to be fostered and developed manage wealth. That might make more sense than in order for the trust to have some chance of the incentive ambush. A perfect example of how success. Mr. Hughes’ article is recommended this might be done is the family limited partnership reading for anyone drafting incentive trusts (or any in which the children are materially involved. trusts). Once the trustee is selected, it seems Another method for involving the children incumbent that the trustee’s relationship with the in wealth management is the “apprentice trustee” current or future beneficiary be given time to provision, which could be considered in current or develop. If the trust is which future gift trusts. An example would be the will not mature until the death of the “incentor”, appointment of an independent trustee, followed by then two options are available: either introduce and a provision that permits the child, after attaining foster the relationship during the incentor’s the age of maturity selected by the parent, to lifetime, in anticipation that the trustee selected appoint himself as Co-Trustee. Thereafter, upon will, in fact, serve; or, make the trust a “FIT” (flip Drafting for Special Circumstances 16-B-4 incentive trust ) or “DIT” (deferred incentive trust - 1. DETERMINATION BY THIRD which should, of course be distinguished from a PARTIES “DGIT, or defective grantor trust) which employs A non-fiduciary could be vested with traditional discretionary standards for distributions power to decide on factual circumstances or until an appropriate time after the trust matures, a conditions. For example, one might appoint A, B length of time sufficient for the trustee and and C, as a special committee to determine the beneficiary relationship to develop. [status or condition] of the trust beneficiary. For Among the salient points of discussion in purposes of this bequest, [status or condition] shall Mr. Hughes article are: (i) curing “remittance mean [definition]. The special committee shall be addiction”5 , a particular symptom of affluenza; the binding arbiter of whether [status or condition] (ii) understanding the human relationship between exists or continues to exist. The opinion of the trustee and beneficiary6; (iii) fostering a special committee, which shall be by majority vote, relationship of full participation by the beneficiary, shall bind each and every distributee under this leading to the trustee’s serving in the role of the document, each and every fiduciary under this beneficiary’s representative, not his adversary7; (iv) document and each and every person or entity who the evolution of an excellent, educated beneficiary8; has any interest in my estate or in any trust herein and (v) establishing procedures for measuring the created. Such opinion shall not be subject to performance of the trustee, as well as the judicial oversight, review, modification or reversal. beneficiary9, including periodic trustee affirmance10 2. CONFLICT RESOLUTION and protectorate11 review and oversight. Recognizing that a trustee’s discretion is V. ADMINISTRATIVE AIDS probably not absolute (regardless of what the One might decide specific, objective document says), is it time to draft into incentive standards are better than global, subjective ones. trust agreements those alternative dispute Barbara Anderson’s preceding article gives many resolution provisions that estate planners are likely examples of incentive trust provisions. However, to have in their family limited partnership finding a fiduciary to administer them may be agreements? If the thought of several pages of difficult. ADR clauses is distasteful to the drafter or the This will suggest some ideas for how the incentor, then perhaps it is time to include in trusts difficult task of monitoring and administering a simple statement that disputes will be resolved in incentive trusts might be addressed in their the first instance in mediation (the cost of which planning and drafting. Unlike the practical and shall be shared by the trust, on the one hand, and ethical considerations present when an estate the beneficiary - out of his own pocket - on the planning engagement involves the current other); or, failing settlement in mediation, by participation of multiple generations, incentive binding arbitration. Query: brokers use drafting is rarely going to involve the children. arbitration clauses in their , why don’t Hopefully, some of these ideas will suggest how the we use them in our trusts? Sample language: in the inherent emotional, if not legal, conflicts of interest event of a dispute concerning this condition, the created by these types of trusts might be addressed. matter shall be subjected to binding arbitration by A. Determining Existence of Conditions all interested parties, participation in which shall be For the purpose of determining when a condition precedent to receipt of any property, distributions can be made, an obstacle for the rights, or benefits of any kind under this document. administration of an incentive trust is defining Status or condition for purposes of any whether a particular status or condition exists, incentive trust document should be specifically continues, or has terminated. Should the trustee be stated and defined, even if a procedure for the only decision-maker? Should a third party be determination by non-judicial means is used. considered to determine the existence of Hundreds of examples come to mind, including all conditions? of those suggested at the top of this article. The Drafting for Special Circumstances 16-B-5 problem is only going to be Murphy’s law: the Because distributions to or for the benefit more specific one tries to be, the more likely it is of my child are to be made in the that something will be left out. discretion of the TRUSTEE, I encourage B. Trustee Incentives and request that ten (10) years after the The buzz of commentary regarding creation of this trust and each five (5) incentive trusts brings into sharp focus the years thereafter that the TRUSTEE precarious role of the trustee. If a fiduciary is to complete a reassessment of the personal be the moral, social, religious, sexual, behavioral and financial needs and circumstances of and financial judge of a beneficiary’s life, then, at my child, by employing any of the minimum, couldn’t we give the trustee some processionals described above, and that breaks? Below follow some ideas for how the the result of such assessment be incentive trust might be drafted to diffuse some of considered by the TRUSTEE in exercise the trustee’s responsibilities. At least, they offer of its discretion. ideas for how to balance the traditional role and the 2. GRANTING A “POWER” TO new demands. PRESERVE FLEXIBILITY AND 1. OUTSIDE PROFESSIONALS DECREASE LIABILITY To assist the trustee in carrying out its role Some flexibility to work with “deserving as the beneficiary’s mentor, representative or beneficiaries” might be gained by giving the advisor, consider the employment, as an expense of fiduciary or a third party a special power of the trust’s administration, outside professionals. appointment to direct trust assets to a beneficiary. As representative language: Powers of appointment are generally considered to I request that the TRUSTEE employ, and be personal to the holder and not subject to review the TRUSTEE shall be authorized to based on an external standards. For example, if employ, as an expense for the benefit of principal is to be preserved, but there is fear that my child, to be considered as part of the invasion might be needed, try something like: total monthly sum which can be The Trustee shall not invade the principal distributed to or for his benefit, a of the trust. The Trustor intends that none psychologist, psychiatrist, social worker, of the principal be distributed because the or case manager (or all of the above) to Trustor does not intend for the trust estate assist in determining the initial and on- to be dissipated for expenses of life going personal needs and circumstances of sustaining procedures which might only my child, in connection with distributions serve to artificially prolong his death if he for his needs. If my child shall fail or shall suffer an incurable condition caused refuse to assist the TRUSTEE in by injury, disease or illness certified to be supplying financial, medical or personal a terminal condition by two physicians, all information about himself or the resources in accordance with the Trustor's statement available to him which the TRUSTEE contained in a Directive to Physicians may find it reasonable or necessary to executed by him on [date], or any similar have, or if my child fails to cooperate in subsequent document. Despite this, working with the TRUSTEE, all financial Trustor recognizes that, because of benefits can be withheld from my child by unforeseen economic circumstances, the the TRUSTEE. The TRUSTEE is given net income of the trust may not always be broad discretion to assist my child, or to sufficient to provide for his regularly withhold assistance as a sanction for his occurring expenses of health, support and lack of cooperation, for the purpose and to maintenance, excluding life sustaining the effect that the TRUSTEE can procedures described above. For this encourage my child’s productivity. reason, the Trustor's living children, or the Drafting for Special Circumstances 16-B-6 survivor of them, shall have a would, of course, expect to be paid for such joint special power of “extra” services) an educational function. appointment over the principal Software systems abound that teach financial trust estate of this trust during the planning. Could a trust simply stage up the Trustor's lifetime which may be required amount of education the beneficiary must exercised in favor of the Trustor swallow, such as requiring meetings to review (but not his spouse, if legally quarterly investment reports and returns, married), in trust or outright, by participation in the development of investment express reference to this power in policy goals, establishment of budgets and open a duly signed and acknowledged discussions of financial matters? It occurs to me written instrument. This power of that some of these functions are often provided or appointment may not be exercised arranged by competent, concerned estate planning in favor of the Trustor's children, attorneys. Maybe, just maybe, instead of making their estates, their creditors or the distributions tied to the beneficiary’s achieving life creditors of their estates. goals that are determined by the trustee, an 3. THE FAMILY OFFICE alternative is educating both clients and Much has been written about the role of beneficiaries in the arena of positive wealth the “family office” in connection with the management and expenditure. administration of wealth.12 Traditional financial services tasks veil the potential educational IV. SUMMARY function of family office. As a focus for family In matters as close to the heart and pocket discussion, sharing goals, ideals and expectations book as incentive trust distributions, someone is with existing (and future) generations of naturally going to be disappointed. “incentees”, the family office structure could provide needed relief for the traditional fiduciary in When bad things happen to nice estates, matters of monitoring a beneficiary’s activities and there are no innocent bystanders. In the development. Even if traditional financial view of the beneficiaries, one is presumed management functions are not handled by the guilty until found judgement proof.13 family office, but instead reserved to the professional or institutional trustee, the family There is a risk of future disappointment office might be considered as a place of decision- when family wealth is tied to standards that are not making and education, as an alternative to easy to enforce. The waive of incentive trust imposing the will of the incentor on a beneficiary drafting may serve some goals of thoughtful trust through a fiduciary. At least the input of third design, but is not likely to leave fiduciaries and party decision-makers, as in the model of the beneficiaries enamored with grantors and , outside board, committee or protectorate, may or their counsel. Collateral educational structures make the concept of trust distribution incentives and solid working relationships need to be built more palatable. around and into the wealth constitution, the trust. 4. FINANCIAL TRAINING The near total lack of organized beneficiary training has always been a mystery. Few, if any, trustees have in place a system for encouraging the financial growth and acumen of trust beneficiaries. Perhaps instead of tying distributions to the life quality issues commonly found in modern incentive trusts, the incentor could do just as well by imposing on the trustee (who Drafting for Special Circumstances 16-B-7

1. Excerpts of representative “incentive” standards from Langley, “Rule Your Riches From Beyond the Grave,” Austin American Statesman, January 8, 2000.

2. The author thanks her thirteen year old daughter, Lynn Green, who listened to the premise of this presentation, for remembering this cartoon and for her deep perception of the issues it introduces.

3. Supra, nt. 1.

4. Hughes, “The Trustee as Mentor”, The Chase Journal, Volume II, Issue 2, pg. 1 (Spring 1998)

5. Id, pg.2.

6. Id, pg.3.

7. Id, pg.3.

8. Id, pg 5.

9. Id, pg 8.

10. Id, pg.12.

11. Id, pg. 9.

12. McCue, “The Family Office: An Outsider’s Perspective,” Trusts and Estates, pg.46 (August 1997)

13. Campisi, ‘The Search for the Deep Pocket - Is it Yours?”, ACTEC Notes, Vol. 25, No. 181, pg.25 (1999).