5 questions when drafting your trust

Trusts can serve many objectives, from tax-efficient wealth transfer to supporting charitable goals to creating a family legacy that could last for generations. Regardless of your objectives, trusts are complex documents that often involve varied assets, multiple beneficiaries and specific conditions for making distributions. “Because each trust is unique, special care must be taken when drafting the documents,” says Jennifer Galvagna, head of Trust, Estates and Tax for Bank of America.

While the actual drafting is a job for an experienced trust attorney, the purpose of the trust is to serve your intentions. Talking these through with your attorney and your advisor can help ensure that the trust document articulates your goals and sets a clear path to achieve them. Here are some questions to ask. 

Have I clearly communicated my intentions?

Creating a trust document that says exactly what you want to say is always the first order of business. Ambiguous wording even on seemingly simple provisions could lead to difficulties down the road. Suppose the trust states that you intend for all your children to benefit. “The word ‘children’ may mean different things, legally, from state to state,” says Scott Marantz, National Trust Executive – Merrill, Bank of America. For example, he adds, “If you want a stepchild to benefit, that’s something you should spell out explicitly.” Otherwise, your biological children could challenge the stepchild’s right to receive distributions.

You should also consider the nature of your assets, Marantz suggests. While cash and marketable securities may be relatively easy to divide, other assets — an art or jewelry collection, a vacation home, or shares of a family business — are less liquid and carry emotional as well as financial value. By carefully considering how you’d like to pass down such assets, you can ease the way for your trustee and reduce the potential for misunderstandings. “If you want something to go to a specific family member but don’t spell it out in the trust, that asset may be sold and the money distributed among beneficiaries,” he says.

If you’d like distributions to support certain needs, “You might write something like, ‘The trustee can pay out for health, education, maintenance and support,’” Marantz adds. The trustee can then decide whether a beneficiary’s request meets that standard. Another consideration is whether beneficiaries should use their own resources if possible before turning to the trust. “Depending on your wishes, you might include language specifying that the trustee shall, or shall not, consider beneficiaries’ outside resources,” says Erica Webber, Senior Trust Officer for Bank of America Private Bank.

To further clarify your intentions, consider writing a separate letter to supplement the trust. “Trust documents by their nature have a very formal construction to ensure that they can be properly administered and upheld,” Webber says. “But they don’t always tell the story of ‘why.’” A “letter of wishes,” while not legally binding, can help your trustee and your beneficiaries better understand your desires and intentions regarding distributions to ensure the proper steps are taken.

Keep in mind that, while drafting trust language correctly is crucial, even irrevocable trusts can be modified to some extent to clarify a grantor’s intentions or to respond to changing circumstances.

Am I being too prescriptive?

Be clear about your intentions, but avoid overly specific instructions that could restrict your trustee’s ability to respond to unforeseen events. “You can’t know for sure what circumstances your children or grandchildren may face 10, 20 or 30 years from now,” Webber says. Say, for example, a beneficiary is going through financial difficulties or a divorce. If you’ve dictated distributions at specific intervals — no matter what — those assets could wind up in the hands of creditors or an ex-spouse. Likewise, trust language stating dollar amounts for distributions to be made years from now may not account for inflation. “Flexibility is key. General guidelines as opposed to mandates can help trustees stay true to your intentions,” Webber says.

Will my loved ones benefit equally?

Your beneficiaries may have different needs, and some may request especially large distributions. This could be a potential flash point if others see themselves coming up short. (See Avoiding trustee (and family) turmoil.) If your goal is equality, ask your attorney to draft an “equalization provision,” Galvagna suggests. When the trust expires and the remaining assets are divided, distributions that have already been made to a beneficiary will be subtracted from that person’s share.

Likewise, if you’ve made substantial gifts outside the trust — say, to put a child through medical or law school — you might refer to those gifts in the trust document with instructions that other beneficiaries receive proportionately more in distributions. Says Galvagna, “The provision might be as simple as: We want the trustee to consider gifts made during our lifetime and through this trust, so that the beneficiaries come out equal.”

What if my trustee can no longer serve?

More than just an administrator, your trustee operates as a fiduciary, meaning the trustee is legally required to serve your best interests, as well as the best interests of the trust and its beneficiaries. If you name a friend or family member to serve in this crucial role, it’s important to consider next steps in case that person dies, becomes incapacitated or simply decides not to continue in the role. “As part of your trust document, a succession plan could either mention successor trustees by name or describe an orderly process for finding replacements,” Marantz suggests. In some cases, an underperforming trustee may need to be replaced. Some grantors, as part of the trust document, name an individual as “trust protector,” someone who has the authority to remove a trustee if necessary.

“Depending on the complexity of the trust and on family dynamics, you may want to consider appointing an independent professional to serve as trustee or co-trustee,” Galvagna suggests. This could be a trusted CPA, an attorney or an experienced corporate trustee such as Bank of America. These professionals can manage details and responsibilities that might overwhelm an appointed family member and can provide an objective buffer to mitigate family disputes. A corporate trustee can also provide continuity for years or even generations. “If you design your trust to be multigenerational, at some point a corporate fiduciary will likely come into play because it’s impossible to anticipate the future needs of your family,” Webber says. “To facilitate that possibility, you might want to put that language into the trust when it’s created.”

What happens if I’m incapacitated?

While trusts naturally focus on how to distribute assets after the grantor is gone, “People may overlook that middle piece: ‘What happens if I’m alive but can’t make decisions on my own?’” Galvagna says. Specifying how you’d like to be cared for can help guide your trustee and relieve family members of having to make hard decisions at a deeply emotional time, Webber adds. “Do you want red carpet treatment and round-the-clock care? Do you want to be in a nursing home or stay in your own home as long as possible? If this trust is for your benefit, you want the document to provide guidelines regarding how much of the trust assets should be used to pay for care, since this will impact what your beneficiaries will receive,” she says. “If you’d like the best treatment possible during your lifetime and you’re not concerned about leaving a legacy, you’d want the trust drafted to prioritize your needs.”

Be sure your trust language aligns with other documents, such as living wills and durable powers of attorney, Galvagna advises. “Grantors may assume their attorney-in-fact will step in and take care of them if they’re incapacitated,” she adds. “But if that’s going to include taking funds from the trust, the trustee will need specific instructions.” Other considerations include ongoing support for children or others you may already be helping financially. You might add language to your trust stipulating that if you’re no longer able to write checks from your own accounts, the trustee can make regular distributions for the same purpose. Similarly, you could direct the trustee to send money to charities you may wish to continue supporting.

How Bank of America can help

Bank of America has generations of experience serving as a corporate trustee or co-trustee and helping clients protect their assets, preserve their wealth and fulfill their legacy. We can work with you, your advisor and your attorney to ensure that your trust reflects your intentions for you and your family.