While the basic use of a trust is legally defined by the IRS as providing health, education, maintenance, and support, a trust creator has a lot of flexibility in drafting trust provisions to be an expression of values.
For example, to encourage heirs to pursue higher education or appreciate the arts, provisions can allow special distributions for university costs or to support a creative career or pursuit.
Someone who wants to support entrepreneurialism may allow for special distributions for an heir starting a business. Or if the wealth builder’s lifelong business pursuits were so absorbing that family time was regrettably sacrificed, the trust may pay out for basic living expenses to give heirs more freedom to choose their own paths.
Think carefully before trying to instill values by setting conditions that must be met before assets can be distributed, says Lisa Featherngill , head of legacy and wealth planning at Abbot Downing . They can create resentment.
Narrow provisions can also have unintended consequences. “Trusts are often designed to last for a long time, and the more limited a trust is, the less able it will be to adapt to a changing environment,” says Lynn Halpern , Bessemer’s senior fiduciary counsel.
Consider a couple wanting heirs to live productive lives who instruct their trust to only pay out distributions equal to what is reported on their W-2 tax forms. Halpern points out that this approach may have worked in a previous era when workers were predominantly salaried, but the gig economy has given rise to a growing percentage of workers whose pay is reported on 1099 forms.
“Even if the tax forms weren’t specifically mentioned, do you really want to attach distribution to pay?” Halpern says. “That would incentivize heirs to be an investment banker rather than a lower-paid teacher or social worker.”
Letter of Wishes
To add a deeper personal touch, advisors are increasingly recommending drafting an informal document called a letter of wishes. It is not legally binding, but it can be a great help for heirs to understand intentions for how wealth should be used, and for trustees when faced with difficult decisions about distributions.
A letter of wishes is a place where a wealth builder can express priorities in how inherited wealth should be distributed. A trustee must legally consider all beneficiaries equal, but if a letter of wishes explains that the spouse is the priority, this can enable the trustee to make distributions to the spouse without concern about how much is left to the kids. “Letters really help heirs, too, when they want to respect the wishes of their parents but don’t necessarily know what those were,” Featherngill says.
These documents can be a heart-to-heart with future generations, a sharing of life lessons, a recounting of family history or life-changing experiences—there is no blueprint.
“It can be bullet points, a mission statement, a personal letter to beneficiaries,” Trammell says. “They’re often really lovely letters that capture a family’s history and become heirlooms in the family.”