The new “goal standard” of estate planning
A deceased client can’t comment on how his remaining personal property should be transferred. Is it any wonder then that the pre-death writing of a client’s post-mortem wealth transfer desires is called a “will”? Curiously, the modern tax-based will has very little, if any, language discussing the client’s personal desires. The lack of personalized dispositive-purpose language in trusts and wills may be more intentional than we realize. A leading estate-planning attorney suggests that “deciding who gets the client’s property is far too important to be left up to clients.”1 However, when the Tax Relief Act of 20102 allowed for the elective avoidance of death taxes, the non-tax intentions of 2010 decedents became very important. Important enough for at least one state to enact legislation to allow courts to look outside the testamentary document to find the client’s real dispositive intent, even if it contradicted the plain words of the tax formula.3 Minimally, a statement of intent (SOI) is a good idea. At its best, a settlor’s SOI within the dispositive document could serve as a material purpose that prevents the intentional termination or modification of a long-term trust by spendthrift beneficiaries.4 The SOI as a personalized declaration of the settlor’s purpose helps protect drafting attorneys, beneficiaries, trustees and even the courts against unreasonable interpretations of trust provisions.
The truth is, clients rarely articulate an overall personal goal for any portion of their testamentary wealth transfers, and, if they do, it usually doesn’t appear within the estate-planning documents. An SOI can’t eliminate the need for legally tested dispositive and administrative language. But, surely, a document entitled “Last Will and Testament” is an appropriate place for a bit of personal testimony.
What an SOI Isn’t
An SOI may be a new term for many in the estate-planning community, so it’s critical to have a clear definition. Perhaps the easiest way to define an SOI is to state what it isn’t:
1. An ethical (spiritual) will;
2. A precatory statement for discretionary trust distributions; or
3. A family mission statement or family constitution.
An ethical will expresses and transmits the personal values of the writer. It’s not a legal document at all (despite its name). In many ways, it’s simply a letter about life to be applied after death. Commentators seem to agree that the first ethical (spiritual) wills were created in ancient Israel.5 Some reference the Jewish patriarch Jacob as providing the first recorded instance of an ethical will.6 Perhaps a more germane example of an ancient ethical will is King David’s “death bed” admonitions:
These are the last words of David.
‘When one rules over people in Righteousness,
when he rules in the fear of God,
he is like the light of morning at sunrise
on a cloudless morning,
like the brightness after the rain
that brings grass from the earth’.7
Note the elements of an ethical will found in this short statement. King David sums up his personal history as a ruling monarch in the form of an admonition to his descendants as to how to rule. He then adds the positive consequence of these ethics by stating that those who display these qualities will be as awesome as a cloudless sunrise and as productive as bright sunlight on rain-drenched grass. The last words of David also make it clear why ethical wills have been referred to as “spiritual wills.”
While the application of an ethical will to the thoughts and actions of descendants is compellingly important, it may be very difficult to apply these ethical statements to wealth transfer. Ethical wills are about transcendent goals and spiritual values; wealth transfer is about practical goals and material values.
Another example of an ethical will comes from President Obama’s letter to his two daughters as he moved to the White House:
[Your Grandmother] helped me understand that America is great not because it is perfect but because it can always be made better—and that the unfinished work of perfecting our union falls to each of us. It’s a charge we pass on to our children, coming closer with each new generation to what we know America should be.
I hope both of you will take up that work, righting the wrongs that you see and working to give others the chances you’ve had.8
The Internet is full of other examples of ethical wills.9 They’re as interesting as the ancient epitaphs on gravestones, but they’re not necessarily effective in explaining wealth transfer intentions. And, even if they were, the executor, personal representative or trustee couldn’t consider them because they’re intentionally separated from the dispositive testamentary documents.
Precatory language is the nonbinding words of instruction that typically are attached to trust provisions as a further explanation of a trust direction. Classic precatory language is found in provisions within a family bypass trust that state as follows: “the trustee may, but is not required to, consider the income of the beneficiary from sources outside the trust in making a discretionary payment.” The words “may, but is not required to” make the statement precatory. Unfortunately, after reading this phrase, the trustee has no better understanding of the grantor’s intent. Should the trustee consider outside income to make the trust assets the funds of last resort, or ignore outside income to make the trust assets the funds of first resort? An SOI would give the “why” of the nonbinding instruction.
A trust document could have a very short SOI related to a specific trustee duty. For instance, the phrase “it is my desire to support my wife with the luxuries and comforts that I would provide if I were still living” technically qualifies as an SOI. However, I suggest a much broader and more personalized declaration of grantor purpose—one that will be a reference point for all precatory language and provide context for all other provisions of a wealth transfer document.
A mission statement is a description of organizational purpose. When properly done, the mission statement can be used to guide the decisions of the organization as it acts through its various constituent members. A generic example of a mission statement that applies to all of us is the preamble to the U.S. Constitution:
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
Often, family mission statements are used to form a family constitution that governs the workings of the family as a unit.
An SOI is about purpose, but not the purpose of a group or organization. It’s about the grantor’s purpose for the wealth transfer. A mission statement is useful for the profit-making activity of a business, because it differentiates the business from its competitors. In a family-operated business, a mission statement is an important and useful guide to defining the impact of family relationships on this profit-making activity. Mission statements are also a helpful tool for family governance in the context of businesses or family-owned assets. However, wealth transfer isn’t about governance.
For wealth transfer purposes, the mission statement will work only if the client’s wealth is regarded as the family’s wealth. James E. Hughes Jr., in his comprehensive treatise on family wealth transfer, Family: The Compact Among Generations,10 assumes that the current wealth of the grantor parents is implicitly the “family” wealth of their descendants. Hughes Jr., and many commentators like him, assume a “family-owned model” for post-mortem wealth. The mission statement and family constitution (or the “compact among generations”) would be an ideal vehicle to codify the post-mortem goals of the family as a group of wealth beneficiaries.
A different opinion on wealth transfer views the current title holder, rather than the family group, as the wealth owner. Under this view, the primary determinant of wealth transfer isn’t the wealth owner’s family, but the individual wealth owner.11 A grantor’s SOI is the better solution for purposing wealth transfer under this individual ownership view.
Finally, a family mission statement requires a family that agrees on a mission. An SOI simply requires a wealth owner with a clear purpose for transferring wealth. A professional advisor will have enough difficulty assessing and codifying the wealth owner’s transfer intentions. It’s exponentially more difficult to assess the future intentions of a constantly changing family group. In reality, the SOI is generally much simpler and more useful to drafting attorneys, trust administrators, personal representatives and courts.
The individual owner view of wealth allows us to use the client’s current financial management process as a paradigm for wealth transfer planning. For example, when a client gives up current consumption to save or invest money, there’s always an explicit or implicit reason for that decision. Values are often nothing more than the priority of preferences. And the preference to save and invest will often uncover very important client values.
Sometimes the reason for accumulating wealth is so ingrained in an individual’s value system that he thinks he has no independent reason for saving. However, at the core level, there’s a personal preference that reveals a personal value. Is the saving for unforeseeable personal emergencies, or is it to maintain control over something or someone? Is it for some personal aspirational desire? Or, is it to help educate family members? For a professional money manager to properly invest a client’s savings, he must have an answer to the “why-are-you-saving-this?” question. The same is true in wealth transfer, except the question is, “why are you transferring this?”
Once you discern the “why,” you can establish appropriate investment goals. These goals will then inform the portfolio management process. The answer to the “why are your transferring this?” question is the SOI. With that in place, it’s possible to create a wealth transfer document that properly accounts for wealth transfer timing and transfer tax minimization. Successful wealth transfer is simply fulfilling the grantor expectations with optimal tax efficiency.
Defining the grantor’s expectations isn’t that easy. Virtually any investment manager will opine that a key problem in investment management is unrealistic client expectations. The same can be true in wealth transfer planning. At least one commentator notes that clients’ underlying estate-planning intentions are often so difficult to determine or implement that the drafting attorney defaults to a form document that essentially substitutes the attorney’s professional judgment and prior experience for those of the client.12
A provision substituted by an advisor may not be the best response to an unreasonable wealth transfer goal. A better solution may be to change the conversation entirely, and use the client’s personal history, as well as the advisor’s professional experience, to uncover an achievable wealth transfer goal. Wealth transfer should be in furtherance of the client’s previously expressed values. However, contemplating and defining personal values is a difficult task for many wealth owners. “People don’t really know what their true values are. They talk about their aspired values, purported values, or what they may consider to be politically correct values, but they don’t really know what their actual values are.”13
Three Minimum Requirements
With the client’s values properly profiled, it’s possible to draft a written SOI. The goal of the SOI is to provide insight into the grantor’s overarching philosophy of wealth transfer. The SOI should use goal-based language that clearly establishes the grantor’s material purpose for the trust. It should be intentionally designed to give the attorneys, accountants, beneficiaries, fiduciaries, money managers and the courts guidance on the wealth owner’s purpose for the wealth transfer, because the grantor’s death, by itself, gives no meaning to a wealth transfer. An SOI provides that meaning.
Here are three minimum requirements for an effective SOI. It should:
1. Demonstrate a unique intention of the grantor that’s tied to personal history, values or perspectives. The test is whether the information expressed in the writing couldn’t be known without specifically asking the grantor. Therefore, a generalized statement—“I want my descendants to be productive citizens”—wouldn’t be an effective indicator of intention, because the statement could be attributed to any parent. However, the statement that “as an immigrant to the United States, it is essential that my descendants demonstrate a continuing commitment to taking advantage of the myriad of opportunities for personal and professional achievement offered by this country’s freedoms” would be more effective.
2. Clearly articulate a direct tie between the grantor’s unique personal intentions and the creation of the specific trust in question. The words “this trust is for the benefit of my descendants” wouldn’t be optimal. However a sentence that says “this trust is specifically designed to serve as a financial catalyst for the personal and professional achievement of my descendants” would tie in much better to the intentions expressed in the preceding paragraph.
3. Give some indication of the grantor’s opinion on modification or termination of the trust by the beneficiaries, trustees or courts. A statement that the trust should be terminated “when it is no longer economically prudent to continue it” is boilerplate. A more useful sentence would be: “The drive for personal fulfillment and achievement never ends and therefore this trust should be maintained to augment and support such efforts of the beneficiaries and should not be modified to serve an alternative purpose since I have provided other funds for those purposes.”
“Sample SOI,” this page, includes these three minimum requirements.
Although traditional estate planning has been built around form clauses and sample language, an SOI, by definition, has no boilerplate. Each wealth owner’s life story and wealth transfer goals are slightly different. However, it’s still helpful to see actual examples of SOIs. For instance, one accomplished estate-planning attorney used an SOI to communicate why wealth transfers weren’t to be distributed to generations beyond grandchildren:
I have with full knowledge and intent not provided for the generation of my great-grandchildren and future remote descendants. I have not provided for them not out of a lack of affection or concern for their welfare but because I have certain charitable objectives that I wish to fulfill and because I feel a deeper responsibility and obligation to provide for my children and grandchildren as reflected in this trust document.14
A sample trust created by noted authors Jon J. Gallo, Dr. Eileen Gallo and Dr. James Grubman includes another example of an SOI:15
To my descendants and their Trustees, both living and those to be conceived and born in the future:
On the most basic level, the purpose of this trust is to further the pursuit of happiness by my descendants. I use the phrase the pursuit of happiness in the same way as our Founding Fathers used it in the Declaration of Independence. Neither they nor I were or are talking about acquiring more material goods or taking longer vacations but rather the sense of self-sufficiency that is derived from becoming self-reliant and financially sound, having a sense of emotional, social, and mental competence and giving back to the community.
The money in this trust will help make things more convenient for my descendants but it cannot make them happy. I believe that the family’s money, including the money in this trust, should be viewed as a tool to support the growth of the family’s real capital, which consists of the family members and their knowledge achieved through life experience and education. This is why I believe that travel, involvement in philanthropy and education to one’s maximum potential are so important.
This sample SOI is the first paragraph of a trust that provides discretionary trust provisions for travel and education. There’s also precatory language that encourages generosity to beneficiaries and to charity. Overall, including such an SOI within a dispositive document should make it significantly easier for the trustee and the beneficiaries to manage expectations, as well as distributions.
Continuing the Conversation
The conversation of wealth transfer isn’t about death or tax minimization. It’s essentially about the extension of the benefits and detriments of wealth to someone other than its current owner. Intuitively, every human being knows that the lasting joy of personal fulfillment isn’t directly related to wealth. Equally inherent to each of us is the notion that transfers of wealth can give some measure of personal satisfaction, even if the wealth transfer is deferred until after death. Avoiding death and taxes can’t be the real goals of a client’s wealth transfer intentions. Instead, the wealth transfer (material) purpose identified in the SOI often is the real goal. If this is true, then an accurate SOI may be the most important provision ever drafted for an estate-planning client.
1. Howard M. Zaritsky, “How Important Really Is What the Client Wants?” LISI Estate Planning Newsletter #1857 (Aug. 29, 2011).
2. Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312), enacted Dec. 17, 2010.
3. Florida Statutes 736.04114 (3):
In construing the trust, the court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and the settlor’s probable intent. In determining the settlor’s probable intent, the court may consider evidence relevant to the settlor’s intent even though the evidence contradicts an apparent plain meaning of the trust instrument. See www.leg.state.fl.us. Title XLII, Chapter 736 (2011) (emphasis added).
4. See Uniform Trust Code Section 411 Comments:
Subsection (b), similar to Restatement Third but not Restatement Second, allows modification by beneficiary action. The beneficiaries may modify any term of the trust if the modification is not inconsistent with a material purpose of the trust.
5. Dr. Eric L. Weiner, “Words From The Heart—A Practical Guide to Writing An Ethical Will,” Workbook First Edition (2010) at pp. 2-3.
6. Robert G. Alexander, “Ethical Will: Gifts of the Heart” CCH Financial and Estate Planning Articles, par. 32,901. The concept of ethical wills isn’t a new one. In fact, this concept is said to date back almost 3,000 years to the Old Testament book of Genesis in the Bible. In Genesis, Chapter 49, when the Patriarch Jacob was dying, he brought his 12 sons together, and on his deathbed he told them stories, predicted their futures and imparted to each one of them the lessons he had learned during his lifetime. In the Jewish religion, ethical wills were an oral tradition; written ethical wills are said to date back to the 20th century, when it was a custom to give written directions for the religious and secular guidance of children.
7. Quoting from II Samuel 23:1a, 3b and 4, New International Version 1973, 1978, 1984, 2011 by Biblica.
8. President Barack Obama, excerpt from a letter written to his two daughters on Jan. 18, 2009. See Rachel Freed, “Life Legacies,” www.life-legacies.com/ethicalwills/samples.html.
9. See Dr. Barry K. Baines, www.ethicalwill.com.
10. James E. Hughes Jr., Family: The Compact Among Generations (Bloomberg Press 2007).
11. The tension between the wealth owner’s right to limit the future uses of his property and the right of family beneficiaries to be free from “dead hand” control is at the core of a centuries-old legal debate. See Professor Allan Newman, “The Intention of The Settlor Under The Uniform Trust Code: Whose Property Is It Anyway?” 38 Akron Law 649 (2004-2005). See also Shelly Kreiczer-Levy, “Inheritance Legal Systems And The Intergenerational Bond,” 46-3 Real Property, Trust and Estate Law Journal 495 (Winter 2012).
12. Supra, note 1.
13. David Bergman and Eric Sanderson, “Creating an Estate Plan: Managing the Paradox of Conflicting Values,” Journal of Practical Estate Planning (October-November 2010) at pp. 24-25, quoting Dr. Guenther Weil, psychologist and founder of Value Mentors LLC.
14. Used by permission. Although this statement of intent (SOI) is useful for showing that the trust isn’t designed for remote descendants, it may not establish a material purpose that would prohibit the children from terminating or modifying the trust in Uniform Trust Code jurisdictions that permit trust modification or termination by beneficiary consent.
15. Jon J. Gallo, Dr. Eileen Gallo and Dr. James Grubman, “The Use and Abuse of Incentive Trusts: Improvements and Alternatives,” The University of Miami 45th Annual Heckerling Institute of Estate Planning, par. 1107, pp. 11-43 (January 2011). The sample wasn’t labeled as an SOI by its authors. However, the use of an overarching purpose for the trust is the reason it’s such an excellent example of a statement of wealth transfer intent. Note the authors are advocating for a financial skills trust that’s innovative and worthy of additional study. The inherent limitation of the trust is that it implicitly focuses the beneficiaries on personal financial behavior instead of personal achievement behavior.