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Grantor Intent

A more impactful wealth transfer approach that bridges grantor intent with the changing goals, lifestyles and priorities of beneficiaries

Introduction

In prior generations, grantor intent was largely left for interpretation and disclosure by a family’s counsel and the designated fiduciaries through standard trust provisions after the grantor’s death.

Increasingly, this model is being challenged as grantors and beneficiaries alike seek a more impactful wealth transfer approach – one that helps bridge grantor intent with the changing goals, lifestyles and priorities of beneficiaries.

The following provisions are intended to build this bridge. The Statement of Intent or Material Purpose provision, in particular, provides the opportunity to communicate the fundamental basis of wealth transfer intent, which can be clarified and supported, as appropriate, by the following provisions. It is our hope – and experience – that this type of articulation provides a new focus for estate planning that can lead to greater wealth transfer success for families and the professionals who serve them.

Section 01

Statement of Intent or Material Purpose

A Statement of Intent can serve as documentation of a “material purpose” that may be considered in the context of a proposed termination or modification of a trust, depending upon statutory or case law in a particular state, and that may prevent a proposed termination or modification of a trust that would be contrary to the grantor’s intent. It can be intentionally designed to give the beneficiary, fiduciaries and courts guidance on the purpose for wealth transfer.

In addition, a Statement of Intent is often included to provide insight into the grantor’s overarching philosophy of wealth transfer. The Statement of Intent should be goal based.

Reasons to consider a Statement of Intent:

  1. It can have a more conversational tone than the overall trust agreement.
  2. It can give beneficiaries context for the overall wealth plan.
  3. It can provide an opportunity to share family history and how it has impacted the grantor’s wealth transfer decisions.
  4. It can communicate the grantor’s values (e.g., philanthropy, financial independence, retention of family business, higher education).
  5. It can help avoid misunderstandings.

 

Examples

“The drive for personal fulfillment and achievement never ends and therefore this trust should be maintained to augment and support such efforts of the beneficiaries over multiple generations and should not be modified to serve an alternative purpose unless (a) there are compelling circumstances that make the material purpose of this trust untenable and (b) such circumstances could not have been anticipated by me when I created this trust.”

“I have with full knowledge and intent not provided for the generation of my [grandchildren] [great-grandchildren] and more remote descendants. I have done so not out of a lack of affection or concern for their welfare but because I have certain charitable objectives that I wish to fulfill and because I feel a deeper responsibility and obligation to provide for my children [and grandchildren] as reflected in this document.”

Section 02

Discretionary Distribution Considerations

Version 1

In exercising the discretion granted to the Trustee to make distributions to my descendants under this trust agreement, the Trustee shall consider the following values, [which I consider to be admirable and worthy of emulation]:

  1. The pursuit of higher education, which would include a four-year degree and graduate degree from an accredited U.S. college or university or the foreign equivalent and trade or other certification programs.
  2. Gainful employment, including employment in the arts, academia, or social or public service professions and military service.
  3. Care for minor, disabled, and elderly family members.
  4. Choice to forgo employment outside of the home in order to devote more time to parenting children, including stepchildren.
  5. Support of charitable organizations.
  6. Healthy lifestyle choices, including avoiding abuse of or unhealthy dependence upon alcohol or legal or illegal drugs.
  7. Fiscal responsibility and the avoidance of excessive debt including debt arising from gambling or another destructive compulsive behavior.

Version 2

The broad purpose of the trusts for my descendants is to provide resources to allow my descendants to become self-reliant and develop sound financial management behaviors and to maintain good emotional, social, and mental health, and to provide opportunities for my descendants to give back to the community. In exercising its discretion whether to distribute income or principal for the benefit of any such beneficiary, the Trustee may consider the beneficiary’s other available income and financial resources, and shall consider, in addition to such other factors as the Trustee deems pertinent and reasonable, the extent to which the beneficiary demonstrates growth in or achievement of the following skills:

  1. The ability to live within one’s means, i.e., to manage one’s spending consistent with one’s level of income;
  2. The ability to manage one’s spending relative to one’s income in a manner that would allow one to save a portion of income, as needed (e.g., for emergencies, retirement);
  3. The ability to understand and manage credit and debt processes, leading to avoidance of excessive debt;
  4. Avoidance of destructive compulsive behaviors such as gambling which can result in financial and emotional harm;
  5. The ability to understand and manage one’s personal assets, either using basic investment procedures and principles oneself or delegating such actions to appropriate advisors; and
  6. The ability to generate income for one’s spending needs if additional resources are required or desired beyond trust distributions.

Version 3

In determining the extent to which discretionary distributions otherwise permitted from a trust are advisable, and the manner in which such distributions should be made to any beneficiary of such trust, the Trustee may consider any one or more of the following factors:

  1. The accustomed manner of living of the beneficiary;
  2. Any other income and assets known to the Trustee to be then available to or for the benefit of the beneficiary for such purposes;
  3. The present and prospective needs of the beneficiary and the beneficiary’s descendants;
  4. The character and habits of the beneficiary, the diligence, progress and aptitude of the beneficiary in acquiring an education, and the ability of the beneficiary to handle money usefully and prudently and to assume the responsibilities of adult life and self-support;
  5. Any emotional, marital, financial or other stress or physical, mental or emotional illness affecting such beneficiary;
  6. With respect to any business in which the beneficiary intends to invest, whether the beneficiary will have a controlling interest, whether the beneficiary has a reasonable business plan, whether the beneficiary has the requisite experience to invest in and/or run the business, and the experience and character of any other investor or key employee of such business;
  7. Any amounts previously paid to the beneficiary and the responsibility which the beneficiary has demonstrated in expending such amounts;
  8. Whether the objective might be better accomplished by way of a loan from, or limited guaranty made by, such trust to the beneficiary;
  9. If the beneficiary is married or engaged to be married, whether or not the beneficiary has a premarital agreement, the terms of any such agreement, and any legal disputes between the beneficiary and his or her spouse or any former spouse;
  10. Any substance abuse or destructive compulsive behavior such as gambling by the beneficiary known to the Trustee, efforts by the beneficiary to obtain treatment for such problems and the success of such efforts;
  11. Any individual with whom the beneficiary regularly associates or resides, and that individual’s ability to influence the beneficiary, either positively or negatively;
  12. Any civil or criminal legal proceedings that have had, or may have, an effect upon the beneficiary; and
  13. The present and future tax consequences to the trust, the current beneficiaries and the potential remainder beneficiaries.

Version 4

[Can be used with broader distribution standards such as “best interests,” “welfare,” “well-being,”“comfort ” or where Trustee has “sole discretion.”]

In determining whether a discretionary distribution is advisable and the manner in which such distributions should be made to [any] [primary]  beneficiary of such trust, the Trustee may, in its discretion, make distributions to allow a beneficiary to provide for his or her own family [or donor-advised fund or other charitable organization including a private foundation], including for a beneficiary to utilize an estate, gift or generation-skipping tax exemption, or for a beneficiary’s income and estate tax planning, if the trustee believes such distribution would be consistent with the purposes of the trust and is for the well-being of the beneficiary and the beneficiary’s family. In making this determination, the Trustee need not consider the interests of any other beneficiary. Any exercise of the Trustee’s discretion in making discretionary distributions under this trust agreement shall be presumed to be made in good faith, and to the extent such exercise is deemed to be inconsistent with any duty of impartiality as to current or future beneficiaries of the trust, such duty of impartiality shall be waived.

Consider: Exculpatory Language

The Trustee shall not be liable to the beneficiary or to anyone else for the Trustee’s decision to make or decline to make any distribution to a beneficiary under this Section. Any decision made, or action taken or omitted, by the Trustee pursuant to this Section shall be conclusive and binding on all beneficiaries and parties interested in the trust. My goal in granting the Trustee discretion with respect to distributions is to provide the Trustee with the flexibility needed to react to circumstances that were not anticipated by me when I created this trust and in a manner that serves the best interests of my children and more remote descendants, without placing an undue burden upon the Trustee to monitor the lives of the beneficiaries to ascertain whether they are engaging in negative, addictive, self-destructive or other unproductive behaviors, nor to monitor whether they are solvent financially or otherwise free of creditor’s claims. Without limiting the generality of the foregoing, the Trustee shall have no duty whatsoever to investigate the facts surrounding a beneficiary’s lifestyle and shall not be liable to the beneficiary or to any other person with an interest in the trust for the Trustee’s failure to determine whether a beneficiary is engaged in negative, self-destructive or otherwise unproductive behavior, nor for the Trustee’s erroneous conclusion that the beneficiary is engaged in such behavior.

Section 03

Entrepreneurial Investments

Clients who have created wealth through concentrated investments in their own private businesses often want their descendants to have similar opportunities because they view the opportunity to pursue entrepreneurial careers as potentially leading to greater personal satisfaction for their descendants as well as greater wealth. However, investments in private operating businesses often do not meet the risk profile for trustees for a number of reasons, including the lack of performance history for start-ups, the speculative nature of some investments, and the fact that the beneficiary’s career opportunities and satisfaction may be an inchoate benefit which has to be weighed against the preservation of assets for the beneficiary’s lifestyle needs and the interests of other current or future trust beneficiaries. For grantors who want to permit or encourage these types of investments, consider the following language.

Entrepreneurial Investments

  1. The grantor has at various times founded or invested in operating business enterprises through privately owned corporations, partnerships, and limited liability companies. The grantor has built these businesses through personal, direct participation in the management and operation of these enterprises and commitment to their continued growth and success. The grantor believes that private businesses can be better vehicles to create and preserve wealth than passive investments and can offer practical training and a sense of accomplishment beyond a financial legacy. It is the grantor’s s hope to provide opportunities and encouragement to the grantor’s descendants to pursue similar entrepreneurial careers and therefore authorizes the Trustee, in such Trustee’s absolute discretion, upon the request of the primary beneficiary of a trust hereunder, to invest trust assets in one or more “Entrepreneurial Investments” in businesses in which the primary beneficiary will be actively engaged as a trade, business, or profession, even if such business is new, untried, or speculative. To that end, the grantor directs [authorizes] the Trustee:
    1. To consider the knowledge, skill, and judgment that the primary beneficiary may acquire as a result of such beneficiary’s active participation in the management and operations of the business entity, and the incentives, practical training, non-monetary rewards and sense of accomplishment that this opportunity may provide;
    2. To consider whether acquiring or retaining the Entrepreneurial Investment is consistent with the primary beneficiary’s investment and career objectives;
    3. To review the business plan for such business entity;
    4. To consider the identity, qualifications, and skills of such business entity’s advisors, active managers, and investors; and
    5. To evaluate whether the interests of the trust beneficiaries are better served by an investment of trust assets in the business compared to a distribution of income or principal to the primary beneficiary to enable such primary beneficiary to invest in such business individually.
  2. For purposes of this Section, an “Entrepreneurial Investment” is a direct equity investment in a corporation, partnership or limited liability company where the day-to-day management is directly or indirectly controlled or significantly influenced by the primary beneficiary of the trust, members of such beneficiary’s family including the grantor’s other descendants and the spouses of such descendants, and trusts created by or for the benefit of such persons (“related parties”). “Control” of a business entity means (a) the primary beneficiary and the related parties collectively own more than fifty percent (50%) of such entity’s voting or equity interests, or (b) the voting and/or equity interests of the primary beneficiary and such related parties, when compared to such interests of all the other owners, is sufficiently significant to permit the primary beneficiary alone or with such related parties to determine or significantly influence the conduct of such entity’s business operations.
  3. Entrepreneurial Investments constitute proper investments of trust principal, even though they may lack liquidity, may constitute a large percentage or all of the principal of such trust and have a greater likelihood of failure than other types of investments. The prudent investor rule of applicable state law is expressly waived with respect to Entrepreneurial Investments, as is any duty to diversify Entrepreneurial Investments. The grantor recognizes that Entrepreneurial Investments may require multiple and ongoing infusions of capital and could result in significant losses for the trust portfolio and even become worthless.
  4. The Trustee shall not be required to divest the trust of Entrepreneurial Investments solely because the primary beneficiary ceases active participation in the business operations, although the Trustee may consider this factor in determining whether to retain such assets. To the extent the acquisition or retention of Entrepreneurial Investments may be inconsistent with any duty of impartiality as to current or future beneficiaries of the trust, such duty shall not exist and is expressly waived even though investment in other assets might have resulted in more assets being available for a particular beneficiary or class of beneficiaries, either in the short term or the long term.
  5. The Trustee shall incur no liability whatsoever for investing in or retaining Entrepreneurial Investments pursuant to this Section, and the Trustee shall be indemnified, protected, and held harmless, from and against any and all losses, claims, demands, costs, damages, liabilities, expenses of any nature (including reasonable attorneys’ fees and costs), judgments, fines, settlements, and other amounts arising from or relating to, directly or indirectly, the acquisition of and retention of Entrepreneurial Investments. This indemnification shall be provided from and out of the assets of the trust and shall apply regardless of whether the Trustee is acting as Trustee of such trust at the time any such loss, claim, demand, cost, damage, liability, expense, judgment, fine, settlement or other amount is asserted, paid or incurred.
Section 04

Confidential Trust Provisions

Confidential Trust

  1. Notwithstanding any other provision of this trust agreement, no Trustee, Investment Advisor, Distribution Advisor or Trust Protector of any trust created hereunder (each, a “Fiduciary” and collectively, the “Fiduciaries”), shall furnish any account statement or other account information to any beneficiary of the trust (other than a beneficiary serving as a Designated Representative as defined below), or provide any such beneficiary with notice of the existence of the trust or any information regarding the trust or its terms or assets (collectively, “Trust Information”), until such beneficiary attains the age of thirty-five (35); provided, however, that, notwithstanding the foregoing, no Fiduciary shall furnish any Trust Information to any contingent beneficiary of a trust created hereunder until such time such beneficiary becomes a current beneficiary to whom distributions of income or principal may be made.

    (Other alternatives for describing the relevant time period (underlined portion above)):

    a.        Until the earlier of (i) such beneficiary attaining the age of thirty-five (35) and (ii) the receipt of a written direction to do so by the Trust Protector
    OR
    b.        Until the earlier of (i) such beneficiary attaining the age of thirty-five (35) and (ii) such beneficiary becoming engaged to be married

  2. During such time or times as the Trustee is instructed not to, or by the terms of this trust agreement is not permitted to, provide Trust Information to a beneficiary or beneficiaries hereunder, the Trustee shall furnish any notice, statement, accounting or other instrument permitted or required to be provided to such beneficiary or beneficiaries under the terms of this trust agreement or applicable state law to the Designated Representative (as defined below), who shall be considered a designated representative within the meaning of [insert citation to applicable state statute]. By delivery of such notice, statement, accounting or other instrument (a “Trust Information Document”) to the Designated Representative, the Trustee will be deemed to have satisfied its duties hereunder or at law or in equity relating to the provision of such information and shall have no liability for the failure to provide such information to the beneficiary or beneficiaries directly or for the actions and/or omissions of the Designated Representative. The Designated Representative shall have the authority to acknowledge receipt of any Trust Information Document provided to such person [on behalf of the beneficiary or beneficiaries whom such person represents]. For purposes of this trust agreement, any beneficiary who is prohibited from receiving Trust Information, whether by virtue of the confidentiality provisions of this Section or otherwise, may for all purposes of this trust agreement, including, without limitation, any judicial proceeding and any non-judicial matter (such as receiving notice, consenting to actions by any Fiduciary, approving accounts, granting releases, or entering into a non-judicial settlement agreement), be represented and bound by the Designated Representative, and all such actions taken by the Designated Representative in connection therewith shall be binding upon such beneficiary or beneficiaries.
  3. Wherever the term “Designated Representative” appears in this trust agreement, it shall mean such of the following individuals (other than the Grantor) in the indicated order of priority who [is able and willing to act and] has delivered to the Trustee his or her written acceptance of the office of Designated Representative: (a) _________________ ; (b) each current adult beneficiary to whom (i) the Trustee is then authorized to distribute income and (ii) the Fiduciaries who are then permitted to provide Trust Information; or (c) if there is no such current adult beneficiary, each current adult beneficiary to whom the Trustee is then authorized to distribute income, or (d) if there is no such current adult beneficiary, the custodial parents or legal guardians of each current minor beneficiary to whom the Trustee is then authorized to distribute income. Any person named herein or otherwise appointed hereunder shall be considered a “designated representative” within the meaning of [insert citation to applicable state statute].
  4. By agreeing to serve or act hereunder, each Designated Representative shall be deemed to have consented to submit to the jurisdiction of each court in which jurisdiction and venue are proper to review the administration of the trust and to be made parties to any proceedings in each such court that place in issue any act or omission of the Designated Representative. Each Designated Representative shall act in a fiduciary capacity and in a manner that such person reasonably believes to be in the best interests of those whom such person represents.

Note: The specific law of some states may not permit use of this provision or may impose different requirements for confidential trusts. The drafting attorney should review the applicable state law.

Section 05

Substance Abuse or Destructive Compulsive Behavior Provisions

Authority to Require Testing and Withhold or Decline to Distribute Funds

If at any time the Trustee receives written notice from a Co-Trustee, Trust Protector, any advisor named in this trust agreement or any other interested party (e.g., adult relative of a beneficiary) that a beneficiary of any trust hereunder is unable to give reasoned attention to financial matters or is unable to care for himself or herself because of such beneficiary’s abuse of or dependence upon illegal substances or alcohol, or abuse of legal medications (whether or not prescribed for such beneficiary) or engagement in destructive compulsive behaviors, such as gambling, then the Trustee, in its absolute discretion, may do one or more of the following:

a.        Withhold Mandatory Distributions and/or Decline to Exercise Certain Powers

Withhold any or all mandatory distributions to or for such beneficiary and decline to distribute funds pursuant to any rights of withdrawal and non-testamentary powers of appointment held by such beneficiary.

b.        Require Testing/Assessment

Require that such beneficiary submit to one or more medical examinations (including but not limited to laboratory tests of hair, tissue, or bodily fluids) or other medical or mental health assessment by a licensed medical doctor or other health care professional and to consent to full disclosure to the Trustee by the examining medical professionals and facilities of the results of such examinations.

c.        Require Treatment

If, in the opinion of the examining medical professional, the examination indicates current or recent abuse of or dependence upon a drug or other substance as described above or a diagnosed compulsive behavior disorder, the Trustee may require the beneficiary to consult with the examining medical doctor or other health care professional who will determine an appropriate method of treatment for such beneficiary (such as counseling, or treatment on an in-patient basis in a rehabilitation facility). If the beneficiary consents to such treatment, the Trustee may pay the costs of treatment directly to the provider of those services from the income or principal otherwise authorized or required to be distributed to such beneficiary.

d.        Decline Discretionary Requests

Decline to make any or all discretionary distributions to or for the benefit of such beneficiary until the beneficiary complies with the Trustee’s request to submit to testing or evaluation to receive treatment.

During any such period in which the Trustee has withheld distributions, rights of withdrawal or non-testamentary powers of appointment held by the beneficiary or the Trustee has declined to distribute funds to a beneficiary pursuant to this Section, the Trustee in its absolute discretion may make payments from the trust for the expense of any treatment or rehabilitation programs pursued by the beneficiary and may, in its absolute discretion, make other payments on behalf of the beneficiary which the Trustee reasonably believes will assist in such beneficiary’s sobriety and recovery. The Trustee shall be entitled to rely without liability on information provided by any medical doctor or other professional, any beneficiary, Co-Trustee, Trust Protector or other advisor named in this trust agreement, or any other interested party in making determinations under this Section.

Resumption of Mandatory Distributions

The Trustee, in its absolute discretion, may resume mandatory distributions when the beneficiary provides the Trustee with confirmation from a medical professional that such beneficiary has not abused or been dependent upon such drugs and substances or engaged in compulsive behaviors resulting in financial or emotional harm described above for a period of [insert time period] and when the Trustee, in its discretion, determines that the beneficiary is able to care for himself or herself and is able to manage his or her financial affairs. When mandatory distributions to or for the beneficiary are resumed, the balance, if any, of any mandatory distributions that were withheld will be distributed to or for the beneficiary at that time, but the beneficiary may exercise any withdrawal rights and non-testamentary powers of appointment only if such rights or powers are still exercisable under the other terms of this Trust. If the beneficiary dies before distribution of any withheld amounts or withdrawal of any amounts subject to the beneficiary’s withdrawal rights, the Trustee will hold and distribute such amounts upon the same terms and conditions as the remaining principal and undistributed income is to be held and distributed after the beneficiary’s death as provided in this trust agreement.

Tax Savings

Notwithstanding the foregoing, the Trustee shall not withhold any mandatory distributions to or for the benefit of a beneficiary that are required in order for such trust to qualify for any federal transfer tax exemption, deduction, or exclusion available with respect to such trust, or that are required to qualify the trust as a qualified subchapter S trust (unless the Trustee elects to qualify the trust as an Electing Small Business Trust).

Exoneration

None of the Trustee, the Trust Protector, or any advisor acting hereunder is responsible or liable to anyone for a beneficiary’s actions or welfare. None of the Trustee, Trust Protector, or any advisor acting hereunder shall have any duty to inquire into or monitor a beneficiary’s abuse of or dependence upon such drugs or substances or destructive compulsive behaviors described above. Any decision made or action taken or omitted by the Trustee pursuant to the powers and authorities granted in this Section shall be conclusive and binding on all beneficiaries and other parties interested in the Trust. The Trustee (and any doctor, psychiatrist, psychologist, or other counselor or medical professional upon whose opinions, observations, or examinations the Trustee has relied in administering this provision) shall be indemnified from such trust and held harmless from any liability of any nature in exercising its judgment and authority under this Section, including but not limited to any failure to require a beneficiary to submit to medical examination or any decision to distribute withheld amounts to a beneficiary.

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We welcome opportunities to work with other advisors to help shared clients fully realize the goals they have for their wealth. To explore how we can collaborate, or request a copy of our Modern Trust Provisions, please request a meeting.

Disclosures

This collection of sample trust provisions is designed to be used by estate planning attorneys only. If you are not an estate planning attorney, please consult with one. This collection of sample trust provisions is made available with the understanding that neither Northern Trust nor any individual who worked on these provisions is rendering legal, accounting, or other professional services through the presentation of this collection.

Although the collection of sample trust provisions is the product of much thought and effort, using this collection is not a substitute for informed legal judgment. The attorney must make an independent determination as to whether a particular sample provision is generally appropriate for a client’s trust documents, how it must be modified for applicable state law and to meet any special circumstances and objectives of the client, and whether or not a different provision or provisions not included in these materials would be better suited for a given client or client situation.

Northern Trust makes no representation that any provision in these materials effectively accomplishes its purpose or is valid under applicable state law. Northern Trust reserves the right to require different or revised provisions in the trusts it administers. Northern Trust assumes no responsibility for the sample provisions or their use. By using a sample provision from this collection, the attorney acknowledges that the attorney (and not Northern Trust) is responsible for any document which the attorney prepares that includes any such provision. The attorney must adapt and customize the sample provision(s) for the law of the applicable state and the client’s specific situation.

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