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Drafting for Special Circumstances 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: ESTATE PLANNING AND PROBATE 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 Trustee ........................................ 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 trustees 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
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