The Power and Necessity of the Trust Purpose Statement and The Absolutely Essential Case for the Memorandum of Intent
By: Stephen R. Elville, J.D., LL.M. – Principal
Everything has a purpose or premise. Every second of our life has its own premise, whether or not we are conscious of it at the time. That premise may be as simple as breathing or as complex as a vital emotional decision, but it is always there. – Lajos Egri
This year it was my privilege to be asked to write the annual Heckerling Highlights article for the Estates and Trusts Section of the Maryland State Bar Association. After I readily accepted and took off on the project like a teenager who has just been given a new 2019 Ferrari 812 Superfast (789 horsepower by the way), I soon discovered that given the amount of material presented at the gigantic 53rd Annual Heckerling Institute on Estate Planning (January 14-18, 2019) in Orlando, Florida, which I attended, it was going to be no small task to compile a meaningful summary of the five-day conference materials, an academic ultramarathon comprising more than five large binders of printed material and a plethora of articles, many over fifty pages in length. Where to go and what to do? Well, there was nothing else to do but begin, and with that I was hoping the old saying “beginning is half done” would apply. Three months later, still at my desk surrounded by reams of materials and my article journey looking more like I had set off in a Russian-made Lada rather than the iconic Italian stallion, I had an epiphany. After covering and summarizing selected topics of interest over a broad spectrum, including the issue of divorce in estate planning, elder law caselaw updates, estate planning for foreign assets, dealing with I.R.C. Section 199, retirement plans and charitable giving, recent developments, private letter rulings, anti-money laundering ethics guidelines in terrorist financing, the selection of fiduciaries, tax basis planning, the modern American family, estate planning and minor children, powers of appointment, asset protection, and much more, including the uses of memorandums of intent, it occurred to me that of all the subject matter presented, possibly the most important takeaways from the Heckerling Conference on Estate Planning, and the two subjects that would be of most interest and value to our clients on a practical level, especially given recent experiences in our practice over the past five years, was the importance of proper fiduciary selection and the use of letters of intent. The eternal questions relating to who (and what) is a proper fiduciary were addressed. Who is fit to serve as trustee, personal representative, agent under a financial power of attorney, and health care agent? Attorneys should focus their individual planning processes around this issue, as proper fiduciary selection is likely the ultimate reason a plan will work as intended or otherwise fail. The attorney’s job is to offer solutions and choices, and to be a counselor. Fiduciary compensation is a big issue. The use of a “fiduciary protector” should be considered. Family structures and demographics in the U.S. have changed and continue to change. Married couples now comprise less than 50% of U.S. households. Unmarried couples, young and old, are the fastest growing demographic in this area. Understanding the differences between the traditional World War II, then “Boomer”, then Generation X, and now Millennial generations is key to our collective futures in estate planning, as is an understanding of the effects of divorce, blended families, same-sex and interracial marriage, multi-parent and single parent families, and reproductive technology. Intestacy rates appear to fluctuate depending on family circumstances and structure. Flexibility and pace of change dictate that trust design should include statements of intent, one for the trustee and one for the beneficiaries, especially where trusts are to last forever, along with the inclusion of a trust protector. Standard, oft-used form provisions should be reviewed to determine if they speak to the grantor’s true intentions and whether they address potential future conflicts between the trustee’s fiduciary obligations and the expectations of beneficiaries. Good trust design should recognize the potential for conflict between trustee fiduciary duty and the modes of flexibility now available to the trustee.
From the above we can infer that there is a huge generational gap between the person implementing a trust (the grantor) and the person or persons who will enjoy the beneficial interests of the trust (the beneficiaries). Juxtapose this chasm between the generations, age groups, values, lifestyles, attitudes towards marriage and family, and the evolving definition of what a family actually is, with the continuous changes in Maryland law (for example, the new Elective Share law and the 2019 introduction of decanting legislation), not to mention the same proliferation of statutory change throughout the other forty-nine states (some more than others), and the obvious competition between certain states for trust-related business and assets under management. Because of this divarication, and the reality that nearly all trust documents suffer from “legal document word processing dementia”, the act of showing the grantor’s intention in trusts has now become a standard part of the estate planning process. The problem is that for most estate planning attorneys and law firms that practice in the area of estates and trusts, especially those who subscribe to the “transactional estate planning” (TEP) school of thought, this vital component is lost on them (they are not consciously aware of it or otherwise do not consider it important). So if you are reading this article with the interest of a student, please take special note of the following important sentence as I repeat: the act of showing the grantor’s intention in trusts has now become so important, it must be considered a standard part of the estate planning process.
If you remain intentional, maintain an academic approach to your estate planning, and implement a trust purpose statement (also known as a letter or memorandum of intent), you will be rewarded with the fullest and most complete estate plan possible. You will be “speaking” mainly to the trustee, the person whom you will have carefully chosen (note again the importance of fiduciary selection) and who will internalize and represent your goals, values, and vision into the future, carrying forth your intentions, and by and through the trust purpose statement, whatever form it may take (provision in the trust itself), memorandum attached to the trust, or separate letter to the trustee, will convey your instructions to the trustee about he or she should use the discretionary powers expressed in the trust. As a basic example of why this is important, consider the common ascertainable standard, health, education, maintenance, and support (HEMS). What does this mean? How is the trustee to use his or her discretionary powers? To one trustee, say a Certified Public Accountant (CPA) with a conservative approach, HEMS may mean that the beneficiary must prove their essential need for distributions, with the trustee taking the approach that the preservation of assets is essential not only for the current beneficiary’s future, but for future beneficiaries beyond the current beneficiary; while another trustee may interpret HEMS more liberally, and administer the trust in a manner consistent with more nonconventional notions about the current distribution of funds, even to the extent of exhaustion, for the broader lifetime benefit of the beneficiary. You will also be speaking to a second group of persons – the beneficiaries – who need to know your intentions. Why? Because beneficiaries can cause many problems for trustees, making their jobs, and their lives, extremely difficult and their role as fiduciary impossible. This can cause plan failure in the form of lawsuits against the trustee, the depletion of trust funds in defense of lawsuits, the removal or even the resignation of the trustee, and more.
The role of the trustee was until recently comparably easier, simpler, and more predictable. But in today’s world of trusts, where new laws allow for massive flexibility and never before conceivable changes to trust design, even to the extent of significantly altering the structure of trusts and their outcomes, and where trustees must sometimes choose between the flexibility they are allowed by statute and how that flexibility may conflict with their fiduciary duty, it is incumbent upon grantors of trusts to expend significant time during the design stages of their estate planning to envision the future of the trust(s) they are implementing and create a world of instructions and parameters for the trustee to follow and for the beneficiaries to respect that expands upon the grantors true intentions for the trust and its beneficiaries. It is also the responsibility of attorney and law firms that provide estate planning counsel and advice to grantors of trusts to encourage and facilitate a process whereby outstanding trust purpose statements may be created and memorialized for the long-term future. And so, as it likely was in the beginning, we need to think in terms of “simple” - not necessarily a simple approach, but a simplicity in articulating our goals, desires, values, aspirations, and management parameters for the oftentimes perpetual trust entity that we have, in good faith and with the best of intentions, set in motion into the galaxy of the future.
