Why should an estate plan fail? Why doesn’t the estate planner foresee the issue and fix it before it becomes a problem?
Actually, there are two reasons estate plans falter, and both of them are usually unforeseeable when the planner draws one up. The first reason is that situations arise that the designated trustees handle poorly. The second problem is the economy: It’s hard to see how the market will affect someone’s fortune. It might turn out better or worse than the projections when the client’s plan was drafted.
Consider that even if the person drafting the document were to anticipate such problems, it might take years for the seeds of failure to germinate and turn into something more serious.
When A Trustee Handles A Situation Poorly
Remember that trustees have three primary roles to play: First, they invest trust funds. Second, they perform administrative duties—communicating with beneficiaries, for instance, filing tax returns and so on. Third, they distribute funds to the beneficiaries, often with discretion in determining the amounts and the timing.
In our experience, professional trustees handle the first two roles pretty well. It is the third role where they often need help and the input of family members. For their part, family members seldom handle the first two responsibilities well (investments and admin), and they have a mixed record on distributions. Family members have a difficult time behaving as fiduciaries with their relatives, with whom they might have complicated relationships. For example, a trustee may encounter a situation where the trust does not have enough funds to satisfy all of its obligations. Family member trustees are not likely to spot a funding problem early enough to fix it or even know how, and even if they did, other family members could doubt their motives and neutrality, making it hard for the trustees to get the others to go along with corrective measures. A professional is more likely to spot the developing issue early and to impose the correct measures firmly to handle the situation.
Your Fortune Is Different Than You Thought It Would Be
Sometimes, a client’s wealth is greater than he or she thought it would be at the time the estate plan was drafted. That creates a couple of problems.
Maybe the client said the kids receive the money at age 25 or when the second spouse dies. Let’s say there wasn’t much money—certainly not enough to justify the hassle of hiring a trustee. But then it turns out the client made wise investment decisions, died young and the spouse died early too. The result is that a 25-year-old child winds up with a distribution of several hundred thousand dollars in cash and no idea how to handle it. There is a seamy side of the financial services world, and the clients would have to hope it won’t find their children and take advantage of their naiveté. But sadly, sometimes that happens.
What this situation calls for is someone to review the estate plan and say: “Do you know that the provisions in your estate plan are likely to lead to some undesirable result?” As clients get older, they should have someone knowledgeable regularly review their estate plans, using a current net worth statement and going through what those consequences are likely to be.
The flip side of this problem is that the client’s wealth turns out to be much less than the drafter thought at the time the estate plan came into being. The trust provided for education for the grandchildren in the future and allowed the children generous distributions to lead fairly extravagant lives in the meantime. But poor investments meant there was not enough remaining in the trust to both send the grandchildren to college and allow the children to maintain their lavish lifestyles. Something has to give.