The "Goal Standard" of Estate Planning
Originally published in Trust & Estates magazine.
Updated October 2016.
The modern tax-based will and its cousin, the revocable trust, usually have very little, if any, actual language discussing the grantor’s personal desires.
This lack of personalized intentions usually caused minimal concern for affluent individuals, lawyers and heirs from 1976-2009. In those years, a successful wealth transfer plan was more often measured by tax minimization than goals optimization. However, when the Tax Relief Act of 20101 effectively repealed the estate tax for one year and altered or eliminated certain tax- motivated bequests, unwritten donative intent became very important. For example, in response to the one-year “repeal,” Florida allowed its courts to look outside the deceased person’s will or trust to find evidence of gift intent, even if the evidence contradicted the “plain words” of the document.2
The Statement of Wealth Transfer Intent
Individuals rarely articulate a personal goal for any portion of their wealth transfers within their estate-planning documents. A statement of wealth transfer intent changes all that. Wealth transfer intent has now become so important that what began as a one-year exception in one state has become a trend in the law to interpret unwritten intent in other states.3
Minimally, a clearly written statement of wealth transfer intent (SOWTI) within the will or trust document is a good idea. At its best, a SOWTI could serve as a “material purpose” that prevents the unintended alteration, termination or modification of a long-term trust by spendthrift beneficiaries.4 The SOWTI, as a personalized declaration of your client’s donative goals, also helps protect against misuse, mismanagement and misappropriation of your bequests.
The conversation about wealth transfer was never really about the inevitability of death or the propriety of tax minimization. It was and is about extending defined benefits of wealth to someone other than the current wealth owner. Most of us probably have nagging, counterintuitive suspicion that giving away wealth might actually be more fulfilling than accumulating wealth. And that “suspicion” is why successful estate planning is defined by the accomplishment of the wealth transfer goals set out in a SOWTI.
Therefore, an accurate and articulate SOWTI may be the most important provision in your client’s estate planning documents. While a SOWTI will not eliminate the need for sound, legally-tested dispositive and administrative language, it would surely seem a document entitled “Last Will and Testament” should have some personal testimony. Here are two examples of how a client may begin preparing a SOWTI:
Excerpt from the statement of wealth transfer intent of “Larry Johnson”
“This statement is being prepared by me…to share my thoughts and intentions regarding my estate plan, and also to tell the story of my financial success. My hope is that this statement builds understanding with my family and others about what I’ve achieved in life, and what I yet hope to achieve after my passing.”
Excerpt from the statement of wealth transfer intent of “Maximus Doe”
"(My wife) and I accumulated financial wealth as a byproduct of diligent work efforts, frugal spending habits, eliminating unnecessary debt, and conservative investments. Historically, we’ve placed a very high priority on family ‘values.’ Our ‘happiness’ is derived from our commitment to the welfare of those dependent on us – primarily our children and their descendants.”
The accomplishment of the goals articulated in the SOWTI may be one of the most important measures of your client’s wealth transfer success. To learn more, please read the whitepaper, The Goal Standard of Estate Planning, by Raymond C. Odom, Director of Wealth Transfer Services, Northern Trust.
1. Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312), enacted Dec. 17, 2010. As a result of the American Taxpayer Relief Act of 2012 (ATRA), signed into law on January 4, 2013, the basic exclusion amount for estate and gift taxes was set at $5,000,000, indexed for inflation from 2011. This yields a 2016 basic exclusion amount for estate and gift taxes of $5,450,000, allowing more than 98% of U.S. wealth owners to avoid payment of transfer taxes.
2. See, 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.” leg.state.fl.us Title XLII Chapter 736 (2011) (emphasis added).
“The Florida legislature has amended § 733.1051 of the Florida Probate Code and § 736.04114 of the Florida Trust Code to grant Florida courts broad authority to determine and effect the Testator/Settlor’s probable intent in employing a formula bequest, in the event such bequest does not function correctly due to the lack of a federal estate or generation-skipping transfer (“GST”) tax in 2010. The statutes allow the court to consider “the terms and purposes” of the document, the “facts and circumstances” surrounding its creation and the Testator/Settlor’s probable intent. In the course of this analysis, the court is allowed to consider evidence relevant to intent, “even though the evidence contradicts an apparent plain meaning of the trust instrument.”” Nathaniel Birdsall, “Florida Legislature grants courts the Broad Power to Construe Wills and Trusts in the Absence of a Federal Estate Tax”, Proskauer Rose LLP August 1 2010.
3. See, Fred Franke and Anna Katherine Moody “The Terms of the Trust: Extrinsic Evidence of Settlor Intent” 40 ACTEC L.J. 1
(2014). In this comprehensive article about the use of extrinsic evidence the authors discuss the common law evolution and provide a summary of each state’s law in an appendix. The notable conclusion of the article is that even though the UTC and THE RESTATMENT (THIRD) OF TRUSTS show a strong trend to allow extrinsic evidence for almost any purpose, “For the attorney charged with drafting trusts, the goal ought to be to capture settlor intent within the four corners of the document regardless of the extrinsic evidence rules.”
“The general principle is well settled that extrinsic evidence is not admissible to vary, contradict, or add to the terms of a will, or to show a different intention on the part of the testator from that disclosed by the language of the will.” 94 A.L.R. 26 II. c. General Rule.
However the Restatement (Third) of Property (Wills and Donative Transfers) §10.2 (2003 Updated June 2016) states that “In seeking to determine the donor’s intention, all relevant evidence, whether direct or circumstantial, may be considered, including the text of the donative document and relevant extrinsic evidence.” In states fully adopting §415 of The Uniform Trust Code settlor intent is so important that extrinsic evidence of intent can be consulted even if the language of the trust is unambiguous.
4. See, Uniform Trust Code Section 411. Comment “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.”