When assets are funded into a trust, the distribution of those assets to the beneficiaries is guided by the language of the trust. Most trusts provide very specific guidance to the Trustee with respect to how and when the assets are to be distributed. For example, “$5,000,000 shall be distributed to the beneficiaries pro rata when the youngest surviving beneficiary turns 30 years of age.” There are other situations in which the trust gives the Trustee discretion in making distributions. The trust may provide some guidance in terms of fulfilling a legacy, but in the context of making a discretionary distribution, it is always helpful if the Grantor of the trust is able to whisper into the ear of the Trustee. A letter from the Grantor to the Trustee may be the only way for that “whisper” to occur. If the Grantor is unable to make a call to the Trustee, it is likely the Grantor is no longer available to make such a call. Our firm refers to the letter as a “Grantor Guidance Letter” (the “Letter”).
The Letter is a non-binding writing from the Grantor to the Trustee. In the Letter, the Grantor sets forth the following:
- Grantor’s goals in creating the trust. The “why the trust was created” may seem simple to the Grantor but keep in mind, even if the Trustee was a good friend, memories fade and intent is not always as evident as it may seem when it is not expressed. Also, the Trustee may end up being someone who never knew the Grantor. Delivering the Grantor’s goals in creating the trust to someone who never knew the Grantor is imperative.
- The Grantor’s views regarding the Trustee’s exercise of discretionary powers. This is the real meat of the Letter. The Grantor had goals when the decision was made to accumulate wealth and leave that wealth to the Grantor’s heirs. Detailing those goals in the Letter to the Trustee is endlessly helpful to the Trustee.
- The Grantor’s intent with respect to bequests. If an heir has an opinion about the intent of the Grantor and there is a Letter to guide the Trustee, the Trustee will have a resource to resolve any doubt.
The Letter is separate from the Trust. The Letter is not an amendment or modification to the trust. The Letter is also non-binding. The Trustee can ignore the Letter, but any Trustee dedicated to properly handling the affairs of an estate subject to a trust will not willfully ignore the desires of the Grantor. The Letter does not limit a Trustee’s flexibility to adapt to circumstances that may change over time. Finally, the Letter may be updated or amended by the Grantor at any time.
Beneficiaries of a trust have the right to review the trust document. This Letter can be a confidential communication to the Trustee and does not comprise a “trust document” which a beneficiary is entitled to have. If a Grantor is reluctant to share certain information with heirs which the Grantor seeks to impart to the Trustee, the Letter is a perfect vehicle for sharing such information. The Grantor can relay valuable information about family issues, history and concerns in the Letter. There is no legal privilege protecting the Letter from being produced if it is subpoenaed in a civil dispute so keep in mind that although it may be intended to be a confidential communication, there is a chance heirs will see it if there is a dispute.
The Letter can include anything the Grantor believes will assist the Trustee in carrying out the provisions of the Trust. An example of the beginning of the letter is as follows:
Thank you for acting as the Trustee for our trust. My wife and I worked hard all of our lives to accumulate some wealth to leave to our children and possibly grandchildren. We spent a lot of time working with our CPA, financial planner and attorney to pull together our estate plan. We have some concerns so we thought we would relay them in this letter to provide you some insight. We also wanted to provide you with some guidance.
First, you should know that we love our three children very much and we did our best to raise them. However, Elaine is the most responsible child we have. Becky is very honest and good natured but she is not as responsible as Elaine and she will not be as responsive. You will have problems with Bill and he is very difficult to get a response from in a timely manner. If you start to have problems with Bill, let Elaine know and she will help you. Bill listens to Elaine and he will do what she tells him to do.
We do not want the kids relying solely on the assets of the trust if they are able to work or have another source of income. We want the kids to work or have a spouse who works while they raise our grandkids or act as homemakers. The trust requires the kids to work if they can or find some source of income other than the trust before the age of 60. If you feel that one of the kids is living off of the trust and basically being lazy, we want you to ask for proof of employment or proof of an alternative source of income before making another distribution. The Trust allows for them to be skipped for distributions if they cannot provide proof of employment if they are not homemakers/raising kids and we want this provision enforced.”
Here are some guidance ideas for the Letter:
- You may wish The Trustee to mark an anniversary or event, such as the Grantor’s date of death, a beneficiary’s graduation, a wedding or the birth of a child? This along with the other ideas below can be done with a discretionary distribution.
- You may desire distributions be made to assist with the purchase of a car for a grandchild if they finish high school with a 4.0 GPA or better.
- You may seek to assist an heir purchase a first residence.
- You could impart the desire to assist an heir capitalize a new business. If you proceed down this path you may wish to indicate to what extent, and under what circumstances you would be willing to provide such capital.
- You may wish to incentivize heirs to travel or study abroad.
- You may wish to provide guidance on the investment strategy of the Trust assets. You may instruct the Trustee to be mindful of the good and bad acts of certain companies when investing or to take into consideration companies who are environmentally responsible.
- You should consider providing your Trustee with some family wisdom, sayings or slogans to give the Trustee some insight into your family value systems and beliefs.
Ultimately, your guidance should promote the goals of your trust and good behavior.
Think in terms of you handing over everything you worked for in your life to a person who you never met and asking them to be a steward of your assets for your family when you are drafting your Letter.