Flexibility, though, runs both ways. Attorneys advise against micromanaging the family business transition. “Sometimes people take control too far by not including enough flexibility for the beneficiaries,” says Sampson. “As a result, what seems like a reasonable provision in a trust today might make no sense some years down the road.”
Sampson gives this example: Mark heard that “incentive trusts” could be established to obviate the problem of a child becoming a “trust baby” and slacking off instead of working. So, to inspire a work ethic in his son Jerry, Mark established a trust that would provide distributions to match his son’s earned income each year. However, Mark’s attorney encouraged the inclusion of a provision allowing additional distributions in the trustee’s discretion, just to provide flexibility.
One day Jerry was driving home on a motorcycle when a serious accident left him unable to ever work again. If it were not for the provision allowing discretionary distributions beyond the amount of Jerry’s earned income, the trust assets would not have been available to provide the money required for his medical attendant.
Tat story carries a moral. “Don’t try to design for a scenario that is too specific,” advises Sampson. “It’s a good idea to include a provision that the trustee can make distributions of income and principal in the trustee’s discretion just in case something unanticipated happens.”
Sampson also suggests another point of flexibility: the ability to change a trustee who is uncommunicative or too tight with distributions. “Tere should be a way to replace the trustee,” he says. “You can even give that power to beneficiaries as long as the new trustee is truly independent. Te replacement should not be an employee of one of the beneficiaries, for example, or a relative. Te flip side is that the trustee must be strong enough to sometimes say ‘no’ to the beneficiaries. Te balancing act is to provide enough flexibility without giving so much freedom that the trust becomes a sham.”
Discretionary Payments As the above comments suggest, trusts need to recognize the possibility of future surprises. Tat’s why the trend today is toward the use of “Discretionary Trusts,” irrevocable trusts which do not specify a set amount of income for beneficiaries but allow for trustee discretion.
Sampson says that many business owners tell the trustees something like this: “I want my kids to be educated, and I don’t want them living in a van because they encounter a health problem. But I do not want the money used for lifestyle enhancement.” Such terms may be included in the trust itself or in a side letter addressed to the trustee.
TPI Turf News November/December 2018 95
Familly businesses everywhere establish trust to solve a host of critical problems.\
Discretionary trusts offer considerable protection from creditors and lawsuits. Tat’s because the law says a creditor can only access the assets of an irrevocable trust to the same extent as the beneficiary. So, if the beneficiary cannot get at the money in the trust to pay a business expense without the permission of the trustee, neither can a creditor. Discretionary trusts also free the trustee to invest for the highest total return without needing to worry about meeting arbitrary mandated payouts. So, for example, the trustee may decide to invest more money in a broad basket of stocks and bonds rather than only in lower- yielding bonds which would provide guaranteed but limited income.
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