Families Amend Trusts with "Letter of Wishes"

Congress waited until the last minute but some of you can't take that risk.

As 2012 wound down with a real possibility of big cuts to the federal gift and estate tax exemptions, wealthier families scrambled to set up trusts to protect assets from the Internal Revenue Service. Setting these trusts up so quickly, The Wall Street Journal says, meant not every contingency was accounted for, and now some of those families are going back to give trustees more complete details about how they want their money to pass to their heirs.http://tinyurl.com/m8vp4xg

These addendums, called "letters of wishes," are not legally binding. They do, however, give guidance about priorities when doling out funds, and they've grown in importance since the 2012 scramble, experts say.

Some background

In 2012, many were in a rush to take advantage of the $5.1 million gift and estate tax exemption that was set to expire at the end of that year. Without Congressional action, the exemption would have dropped to $1 million, and the top tax rate was set to rise from 35 percent to 55 percent.

Wealthier families, understandably, were worried that they could face steep tax bills down the road.

Waiting until it had to act to avert the so-called financial cliff, on Jan. 1, 2013, Congress made the higher exemption permanent - and set it up to be adjusted for inflation every year; this year, the exemption is $5.3 million. Congress also set the top tax rate at 40 percent. 

By the time the legislation was passed, however, money had been put into trusts using whatThe Wall Street Journal calls cookie-cutter documents that could be executed swiftly.

Longitude and latitude

Trusts created to beat the 2012 deadline had many similarities, the Journal says, tending to be broadly worded and giving the trustees wide latitude.

After the dust settled, however, many families have gone back to make their wishes more specific. Artwork, real estate, classic cars - anything that might have been glossed over with the original trust can qualify for a letter of wishes treatment. The Journal gives the example of a couple who hastily set up a trust in 2012. They owned a vacation home and were worried that their wishes - that the home remain usable for future generations - were not clearly explained, so they added a letter, expressing this desire to the trustee.

Normally, of course, when trusts are set up, there is time to tailor them to the family's specific point in life. They generally give trustees broad parameters so he or she can adapt to changing circumstances as the years go by. Plus, if the family funding the trust doesn't give up all control of the assets, that money or property might not escape the burden of estate taxes. 

Make a wish

Because they aren't legally binding, a trustee has the option to consult a letter of wishes once the trust funders are gone, the Journal says. In addition, the trustee is under no obligation to disclose the contents of that letter to beneficiaries, although doing so might help prevent family squabbles that could arise once the trust funders have died.

A letter of wishes is especially helpful when it comes to the care and upbringing of minor children. The letter can spell out what the parents want for their children in the way of religious upbringing, education and residence, for example, says Henmans Freeth. Children with special needs fall under this category, with instructions that may stretch into adulthood.

Funeral arrangements are also a place where a letter of wishes comes into play. Unless your client's plans have been shared so that his whole family is on the same page, this is a way for the decedent to communicate his desires about visitation, open caskets, funeral with traditional burial or cremation and the scattering of ashes.

Finally, the Journal says, a trust set up hastily in late 2012 might be intended to go through several generations. A letter spells out their wishes to future trustees, some of whom might not have been born at the time the trust went into effect.

In our experience, relying on a letter of wishes fails to accomplish the level of control that clients really want over how their assets will be disbursed. If you had a "quickie" trust drawn up in anticipation of the 2012 exemption deadlines, now would be a good time for you to consider having an experienced estate planning attorney perform an analysis of your documents in what is called a trust review or an estate plan audit.

We hope this information was useful to you and helps you and your families. If you have a specific case or a question, don't hesitate to call our office at 919-443-3035