In Anna Karenina, Leo Tolstoy wrote that:
“All happy families are alike; each unhappy family is unhappy in its own way.”
In many ways, Tolstoy was correct. The potential sources of unhappiness in a family are many fold. And, each source of unhappiness has its own potential solution or solutions. A good estate planning attorney must start by ferreting out the sources of unhappiness in the family. Once those sources of unhappiness have been unearthed, a plan might be crafted to address the situation. Perhaps just as importantly, plans which would exacerbate the sources of unhappiness may be avoided.
Let’s look at a common source of unhappiness in families: divorce and remarriage. There can be a great deal of friction between the second spouse and the children from the first marriage. There are planning techniques which can be used to address this source for unhappiness. One of the perhaps-unspoken reasons for the unhappiness is that the children from the first marriage fear that their inheritance will be taken by the new spouse. Typically, the assets are left in a trust and the spouse receives the income on those assets, with the remainder going to the children from the first marriage. But, this adds to the friction between the children and the second spouse. The children have a financial incentive to want the assets invested to maximize growth while the second spouse has a financial incentive to have the assets invested to maximize current income.
One solution to this problem is to employ a Total Return Unitrust. A TRU pays the spouse a fixed percentage of the assets of the trust each year. Both the surviving spouse and the children from the first marriage now have the same goal. They want to maximize the value of the trust. For example, if the unitrust rate is set at 4% and the trust has $2.5 million, then the spouse would receive $100,000 that year. If the trust grows to $3 million, then the spouse would get $120,000 that year. Thus, everyone wants to grow the trust and all the beneficiaries’ interests are aligned.
A TRU would be completely inappropriate as a solution to other problems, like a child with special needs. In that situation, the assets should be left in a special needs trust, which is a completely discretionary trust designed to allow the child to keep governmental benefits.
A good estate planning attorney can ascertain the potential sources of unhappiness in the family. Once those sources are identified, they can help design a plan which will help to lessen rather than exacerbate those potential sources of unhappiness.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555