AVOIDING ESTATE PLANNING REGRETS –

CASE STUDIES FOR FORMATION AND CREATION

Mary B. Galardi Galardi Law

Atlanta, Georgia

Shari B. Martin Diversified Trust Atlanta, Georgia

  

AVOIDING ESTATE PLANNING REGRETS – CASE STUDIES FOR FORMATION AND CREATION

Mary B. Galardi Shari B. Martin

TABLE OF CONTENTS

Outline .................................................................................................................................. 1

Presentation ........................................................................................................................ 2

Appendix: Sample Trust Provisions .................................................................................. 15

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AVOIDING ESTATE PLANNING REGRETS – CASE STUDIES FOR FORMATION AND CREATION

Mary B. Galardi Shari B. Martin

I. Introduction II. Stale Documents

a. Overview b. Premature Death of Adult Child c. Change in Net Worth of Client or Children

III. Assets and Liabilities a. Personal Property b. Real Property c. Entity Loans by Testator

IV. Disclaimer Planning a. Lifetime Disclaimer Planning b. Post-Mortem Disclaimer Planning

V. Formula Clauses a. Pecuniary b. Fractional

VI. Trusts a. Advantages and Disadvantages b. Flexibility and Flexibility Traps c. Trust Distribution Standards d. Other Critical Trust Provisions e. Tax Apportionment Clauses f. Trust Protectors

 

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Avoiding Estate Planning Regrets –Case Studies for Formation and Creation

Mary B. GalardiGalardi Law

Shari B. MartinDiversified Trust

Diversified Trust Company, Inc. does not practice law and does not provide tax, accounting or legal advice.

Galardi Law does.

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Estate Planning RegretsEstate planning regrets ensue when any component of the “Who, What, When, Where or How” of the estate plan is different than what was anticipated.

Estate planning regrets generally fall into one or more of the following categories:

• Unintended tax consequences

• Overestimation or underestimation of the size or composition of the estate

• Premature or ill-advised asset distributions

• Distribution provisions that are commonly viewed as inconsistent with the

testator’s or grantor’s intent

Some regrettable results can be addressed, if not corrected altogether. Others cannot. Most, however, can be avoided altogether with careful, thoughtful planning, including extensive (and sometimes awkward) communication.

Stale Documents

Issue • Even without any document changes, life changes, alone, can have a significant

impact on an estate’s disposition.

Problem Prevention• Send periodic letter to clients.• Consider incorporating brief overview of original plan.

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Stale DocumentsScenario 1– Premature Death of Adult Child • Grandparents’ children are all responsible adults. Accordingly, their wills leave all

assets outright to descendants, per stirpes. Adult son dies unexpectedly, leaving two teenage children from a prior marriage.

Problem • Unless there is a holdback clause, the inheritance for any child under the age of

18 will likely require a conservatorship, and the guardian will likely be the children’s mother, the son’s ex-wife.

• Additionally, upon attaining age 18, the assets held in the conservatorship will be distributed outright.

Possible Options• Petition the Probate Court to ask that full powers be allowed under O.C.G.A.

Section 15-12-232(32) to hold funds until at least age 21.

Prevention• The grandparents’ wills could incorporate a holdback clause requiring assets to

be held in trust until a later age, or grandparents could have their wills reviewed as soon as practicable after son’s passing.

Stale DocumentsScenario 2– Change in Net Worth of Client or Children• Grandparents’ children are all responsible adults. Accordingly, their wills leave all

assets outright to descendants, per stirpes. Adult daughter has just sold her company for $20 million. Grandparents die with combined estates of approximately $5 million.

Problem Posed• The daughter likely does not need parents’ assets, and a distribution to her will

increase her taxable estate.

Possible Options• Daughter disclaims and then requests court to allow full powers to hold assets in

trust until age 21.

Prevention• The grandparents’ wills could incorporate a holdback clause requiring assets to

be held in trust until a later age or very flexible GST trusts. • Grandparents and daughter could discuss grandparent’s estate plan, opening

the door to a conversation about the daughter’s estate and her intentions.

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Personal PropertyIssue• Nominally valued personal property can often cause the most challenges in estate

administration.

Scenario• Great grandmother passes away. Her will includes this generic bequest:

“Distribute all personal property to my descendants in equal shares”. All five granddaughters vie for a single doll.

Possible Options• Communication among the granddaughters (or their parents or grandparents)

could be sufficient.• Draw straws.• If there is additional personal property to be distributed to the same people,

create a rotational selection process.

Prevention• The testator could ask family members to let her know what is special to them.• Great grandmother could write a separate letter outlining distributions of personal

property or otherwise designate items to their legatees.

Real PropertyIssue• The testator’s concept of the desires of the legatee may not coincide with

the legatee’s actual desires.

Scenario• Father specifically bequeaths family farm in trust for his descendants, per

stirpes, with the mandate that the farm not be sold.

Problem Posed• The family neither wants nor can afford to maintain the farm.

Possible Options• Petition the court to sell the property.

Prevention• Particularly with respect to assets which have maintenance costs associated

with their ownership, communication is critical.

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Entity Loans by TestatorIssue - Entrepreneurs often own multiple entities and frequently transfer money back and forth between them based upon cash flow requirements. Loans are established, paid back, established and paid back. From the entrepreneur’s perspective, it’s all a wash.

Scenario - The entrepreneur dies owning multiple businesses. Different children are involved in different entities, so he leaves each child the business in which they were most involved. He values each business at book value and estimates each business to be worth about $200,000. The children who were not involved in the businesses share equally in the residue, which he estimates to be about $400,000.

Problems Posed• What were intended to be equal bequests were not.• Attempts to “equalize” could result in unintended and undesirable income tax

consequences.

Possible Options• File a “friendly” contest (OCGA 53-7-63).

Prevention• Pay attention to the cash flow on an entity-by-entity basis.• Involve the CPA for the businesses in the estate planning process.• Approach all specific bequests with caution.

Disclaimer PlanningIssue• While a disclaimer trust allows the surviving spouse maximum flexibility, there is no guarantee that

the surviving spouse will make the decision which is most advisable.

Scenario• Husband dies leaving an estate of $4 million and a will which leaves all assets outright to wife. In

the event of her death or disclaimer, the assets fund a trust for her benefit, during her lifetime. After her husband’s death, she does not want to disclaim.

Problem Posed• The creditor and predator protection made available via the disclaimer trust was particularly

appealing to the husband.

Possible Options• Explore options for naming the widow as trustee/co-trustee, if that provides some comfort.• Encourage consideration of partial disclaimer.

Prevention• Communicate the issues during the planning process.• Do not use a disclaimer will, using instead a standard A-B plan or full QTIP.• Name the wife as the sole beneficiary of the credit shelter trust, perhaps naming her as the

trustee while limiting distributions to a discretionary standard (see Reg. 25.2518-2(e)(2) and (e)(5)) and including a “special trustee” for other distributions.

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Post-Mortem Disclaimer DiscussionsIssue• The result of a disclaimer is not always what is anticipated.

Scenario• Grandparents leave their estate in equal shares to and among their descendants, per

stirpes with one exception. One child is particularly wealthy, and anticipating that child will be leaving a significant estate for his children, the grandparents want that child’s share to be divided among the remaining siblings.

Problem Posed• The child and child’s family is not as well-off as the grandparents had anticipated.• The child and child’s family are hurt that they are not treated equally.

Possible Options• Do not disclaim.

Prevention• Communicate the issues during the planning process.

Formula ClausesIssue• While formula clauses allow for optimal use of the marital deduction and

estate tax exemption, the widely varying exemption amounts over the last 10 years and volatile markets have made it virtually impossible to give clients a clear understanding of how their estates will likely be distributed.

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Pecuniary vs. Fractional FormulasIssue• The amount of a pecuniary bequest is set as of date of death and must be funded with

assets of that value, regardless of the appreciation/ depreciation of the estate overall.

Scenario• A $6 million estate declines in value by 25% between the decedent’s death and the time

of funding. The will includes a pecuniary-formula credit shelter trust, and the marital share will receive the residue. The exemption is $5 million. The estate’s assets are now worth $4.5; there are no assets available to fund the marital trust.

• Consider the same scenario with a pecuniary-formula marital trust. The marital trust would be funded with the $1 million ($6 million less the $5 million credit shelter amount), and the residual $3.5 million at time of funding would fund the credit shelter residual trust.

Possible Options• If advisable, explore waiting to fund the trusts until the assets “return” to their previous

values.

Prevention• Utilize a fractional formula

Pecuniary vs. Fractional FormulasIssue• The satisfaction of a pecuniary bequest, including a pecuniary formula bequest (an

amount equal to…), is generally treated as a taxable event.

Scenario• An inter-vivos “will replacement” trust with testamentary provisions is carefully

structured to serve as the beneficiary of an IRA so that IRA distributions can be paid into the trust over an extended period after the death of the IRA owner. The trust includes a pecuniary formula credit shelter trust. The gross estate is $4 million.

Problem Posed• Allocation of IRD to a trust funded via a pecuniary formula generally causes

immediate recognition of the income.

Possible Options• Partially fund the pecuniary bequest in different fiscal years, at least deferring a

portion of the tax.• Explore the impact of a disclaimer .

Prevention• Name the specific “sub-trust” within the IRA beneficiary designation.• Utilize a fractional formula.

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Outright v. In Trust

Assets in trust:• Provide a degree of creditor and predator protection• Create a natural segregation from marital assets• Can skip generations without transfer tax being assessed (subject to

GSTT limits)• Consider conditional general powers of appointment• Can be as flexible or as restrictive as desired

But be wary of:• 39.6% + 3.8% tax rates on undistributed DNI roughly in excess of

$11,650• 20.0% + 3.8% tax rates in capital gains when net income/capital gain

combined is in excess of $11,650

Trust FlexibilityA beneficiary can• Be a trustee• Appoint a co-trustee• Be a co-trustee• Become a co-trustee at a certain age• Become sole trustee at a certain age• Remove a trustee and appoint another (with a caveat)• Appoint a “special trustee” who can make distributions to the

beneficiary beyond an ascertainable standard• Have the power to withdraw up to $5000 or 5% of the trust’s value

annually without transfer tax consequences• Direct distributions during the beneficiary’s lifetime to a very limited or

very broad class of permissible appointees, in trust or outright• Direct the distribution of trust assets at death to a limited group or very

broad group, in trust or outright• Etcetera, etcetera, etcetera

Other options include trust division, trust termination, trust consolidation, trust modification and decanting.

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Flexibility Traps

• A beneficiary serving as either sole or co-trustee may not make distributions to him or herself unless those distributions are subject to an ascertainable standard. IRC 2041(b)(1)(A) and 2514 (c)(1)

• If the trustee or co-trustee owes a legal obligation of support to a beneficiary, even distributions limited to an ascertainable standard can be considered a general power of appointment. Reg. 20.2041-1(c)(1)

• Care should be taken to ensure that a power of appointment is limited and not general unless otherwise intended. IRC 2041

The “Clear” Ascertainable Standards

• Health - All routine medical care, medication, surgery and hospitalization, extended nursing care and mental health

• Education – Generally includes college education

• Support and Maintenance - More than bare subsistence, including normal living expenses (housing, clothing, food, medical care) based on standard of living enjoyed by beneficiary during the settlor’s life

A trustee’s ability to distribute trust assets to him or herself must be limited to an ascertainable standard, otherwise, the trustee is treated as having a general power of appointment over the trust assets, thereby causing inclusion in the trustee’s estate. IRC §§2041(b)(1)(A); 2514(c)(1).

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Other Distribution Standards

• Comfort - Definition varies by state, but generally construed to be more liberal than support and maintenance

• Best interests or welfare - A broader standard which gives the trustee broader discretion – including the possibility of a more restrictive interpretation

• Sole and absolute discretion – The broadest standard under which the trustee may make distributions for any purpose or withhold funds for any reason, as long as the trustee is not acting in bad faith or arbitrarily

• Emergency - A restrictive standard which allows distribution only for unusual or unforeseen circumstances, not routine expenses or support and maintenance

An independent “special trustee” can be named to allow for distributions to a trustee-beneficiary which are beyond an ascertainable standard.

Surprisingly Critical Provisions (SAMPLE PROVISIONS IN APPENDIX)

Definitions and Intent Clauses• Particularly when there is no relationship between the testator and the trustee, as

well as when the trustee is also a beneficiary (current or remainder), explanations of the testator’s intent can be very helpful.

Consideration of Other Resources• In the absence of provisions or direction to the contrary, the trustee is generally NOT

required to consider other resources available to the beneficiary in the determining whether or not to make a discretionary distribution.

• If the testator desires that the beneficiary’s personal resources should first be exhausted prior to encroachment upon the trust, this should be clearly stated in the document.

Unequal Distributions from Trusts• In the absence of language to the contrary, there is generally a presumption that

the trustee should equalize distributions. The document should clearly state if this is not the testator’s objective.

Priority Among Beneficiaries• Barring language to the contrary, a trustee has a duty to preserve trust assets for the

remainder beneficiaries. This is frequently not the testator’s true intent.

“USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite

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Age Triggers v. Discretionary Termination (SEE APPENDIX)

Age Triggered Mandatory Distributions• Loss of creditor protection• Separate assets often become marital assets

Age Triggered Rights of Withdrawal• Separate asset status maintained

Discretionary Termination• Creditor protection maintained• Separate asset status maintained

“USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite

Tax Apportionment ClauseIssue• Estate taxes are typically paid from the residue of the estate.

Scenario(s)• The estate’s value is $8 million. The $6 million home is left as a specific bequest

to a niece, and the residue is divided among all nieces and nephews. The estate tax is paid from the residue. Under the current tax laws and assuming full availability of the estate tax exemption, the estate taxes of just over $1 million would be paid from the $2 million residue, equally reducing the share of all beneficiaries.

Possible Options• Hope and pray for a friendly, non-judicial settlement.

Prevention• Make the tax apportionment unquestionably clear in the will.• Draw the estate disposition picture, clearly illustrating who will receive

approximately what on an after-tax basis (then have the client sign it).

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Trust Protectors

• A Trust Protector is typically a third-party who is appointed by the grantor/testator to have some degree of oversight over the trustee.

• Duties are outlined in the trust document but often include these powers.• To remove and appoint a trustee

• To terminate the trust

• To change the trust situs

• To redirect trust distributions

• To veto investment decisions

• To amend administrative provisions

Benefits of Trust Protectors• A trust protector allows the benefits of the knowledge and skill set of a trusted

advisor without requiring that advisor to serve as trustee.

• A trust protector provides a truly objective “second set of eyes” to review the performance of the trustee.• Investments

• Discretionary actions

• Responsiveness and service orientation

• A trust protector provides the trustee with an unbiased resource to provide insight into family dynamics, testator intent, and other areas which can enhance the trustee’s ability to fulfill its duties.

• Like the choice of trustee, the choice of trust protector can be difficult.

• Trust Protectors can be given as broad authority as the testator desires.

• Care should be taken, however, with the level of authority, as Trust Protectors are typically not subject to a fiduciary standard.

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The Moral of the Story

Encourage your clients to give thoughtful consideration to their estate plans, including talking them through various “what-if” multi-generational scenarios.

Their legal fees now may be slightly higher than they anticipate, but the legal fees paid by their estate or their heirs may be exponentially lower as a result.

And, you will have far fewer estate planning regrets.

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APPENDIX SAMPLE TRUST PROVISIONS

DEFINITIONS AND INTENT CLAUSES SAMPLE TRUST PROVISION The term "education" includes, but is not limited to, the expenses of private schooling at the elementary and secondary school level, college, graduate and professional schools, and specialized or vocational training. SAMPLE TRUST PROVISION The term "best interests" shall be construed to provide the beneficiary with means to enjoy a comfortable lifestyle and to assist the beneficiary's descendants as the beneficiary may wish, including distributions to allow the beneficiary to make gifts to the beneficiary's descendants. SAMPLE TRUST PROVISION The term "best interests" with respect to distributions to any beneficiary shall be construed to provide the beneficiary with the means to enjoy a comfortable lifestyle, including recreation, cultural pursuits, and travel, but, in the case of a descendant of mine, shall not be construed so generously as to discourage the descendant from assuming the responsibilities of self-support. “USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite SAMPLE TRUST PROVISION

6.1 After my Wife’s Death. At the death of my wife (or at my death, if my wife predeceases me) the Trustee shall divide the property into as many equal shares as I have then living children and deceased children with descendants then living (per stirpes). Each share set aside for the then living descendants of a deceased child shall be further divided into equal shares for the then living descendants of the deceased child (each living child and the living descendants of a deceased child defined as “beneficiary”). The Trustee shall hold the resulting share of each beneficiary in a separate trust for the primary benefit of the beneficiary and administer, manage and distribute the property of each trust as follows:

(A) Distribution of Income and Principal. The Trustee may pay so much of the net income and the principal of the trust as the Trustee deems necessary, in the Trustee’s discretion, to provide for the health, education, maintenance and support needs of the beneficiary and his or her then living descendants. The Trustee shall

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accumulate any income not expended and add it to the principal at least annually. It is my desire that income and principal also be disbursed for the benefit of my grandchildren (if any) to be used for their Christian education.

(B) Special Purpose Discretionary Distributions. The Trustee may also distribute to, or for the benefit of, the beneficiary a portion of the income or principal to enable the beneficiary to marry, to enter into a trade, profession or business, to purchase a home or for similar purposes, if the Trustee deems such distribution to be in the best interest of the beneficiary.

(C) Distributions of Trusts. If and when the beneficiary has reached age thirty (30), the beneficiary has the right, by written request, to a distribution of one-forth (1/4) of the property then in the trust. If and when the beneficiary has reached age thirty-five (35), the beneficiary has the right, by written request, to a distribution of one-third (1/3) of the property then in the trust of the beneficiary. If and when the beneficiary has reached age forty (40), the beneficiary has the right, by a written request, to a distribution of one-half (1/2) of the property then in the trust of the beneficiary. If and when the beneficiary has reach age forty-five (45), the beneficiary has the right, by written request, to all of the property then in the trust of the beneficiary.

(D) Beneficiary’s Power of Appointment. The beneficiary shall have the power by his or her will, making express reference to this power, to direct that any part or all of his or her trust be distributed to, or for the benefit of, any of his or her descendants, provided that in no event is this power exercisable to appoint any of the trust property to the beneficiary, to the beneficiary’s estate, to the beneficiary’s creditors, or to the creditors of the beneficiary’s estate; except that if upon the death of a beneficiary, any distribution from the trust would otherwise constitute a taxable generation-skipping transfer, then this power is also exercisable in favor of the beneficiary’s estate. This power must not be exercised so as to cause an increase in the time any property will be held by the trust beyond the provisions set forth in this Will, and in no event beyond the rule against perpetuities limitation.

(E) Distribution of Property Not Appointed. Upon the death of a beneficiary, any property remaining in the beneficiary’s trust, and not distributed by the exercise of the power of appointment conferred in the previous paragraph, shall be divided into separate shares for his or her then living descendants and be held and distributed as provided in this Item Six. If there are no living descendants of the beneficiary, then the trust property shall be added equally to the trust shares originally set apart for my other beneficiaries or their descendants and be held and distributed in all respects as if it had originally been a part of such other shares. 6.4 Statement of Intent. This item explains my intent in granting the rights and discretions contained in the trusts created by Item 6.3. It is meant only as a non-binding guide of that intent, and does not change or limit those rights and discretions.

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This statement of my intent is designed to express my philosophy in dealing with my children. It is designed to aid the Trustee in the discretionary duties and judgments which will need to be exercised from time to time in dealing with my children.

It is my strong feeling that my children should be productive citizens and should be encouraged to receive the requisite education to train them for a vocation or profession so that they can earn a livelihood separate and apart from any inheritance or income which might be payable to them from a trust created by me at my death. I believe my children should be afforded the opportunity to “struggle,” because I am fearful that ready access to income to meet their basic needs may tend to stifle their initiative and resourcefulness. I realize that there may be substantial funds available to my children, and that if the Trustee is too liberal in the Trustee’s exercise of judgment that my purposes and intent may be frustrated.

It is my desire that my children be educated to a degree commensurate with their aptitude and abilities. This may mean a college education, vocational or technical training, or a professional education, again dictated by their abilities and motivation. I wish the Trustee to be liberal in expending funds for their education while being mindful that I do not want them to become “professional students.” To that end I would expect that their grades be in keeping with their aptitude and abilities and should not reflect under-achievement. That is not to say, however, that I expect my children to be “A” students unless their aptitude and abilities warrant such expectations.

After their education is completed, I expect my children to enter into the job market and earn a livelihood commensurate with their abilities and training. I do not expect this trust fund to be utilized as the primary means of their support and maintenance unless illness, adverse health or accident should warrant or make support and maintenance necessary under the circumstances. This trust fund should be used to provide supplemental income for vacations (provided they are reasonable in nature and duration) for themselves and their families, and to provide those amenities and enrichments that tend to enhance their lives, rather than providing basic necessities and needs which I expect them to provide with their own labors. I would expect that the trust fund could be utilized for a down payment on a home or funds with which to begin a business, provided the Trustee feels that the business is viable and the prospects for success are good. Funds to begin a business, however, should take into account the age and maturity of my children and the business expertise required by the business and whether or not my children are mature enough to operate the business. I have provided in this Trust that discretion is granted to withhold payments of principal to my children. The Trustee should also look at the other terms of this Trust on discretion to withhold to make sure that outside circumstances do not warrant necessary action being taken by them to protect the funds.

My intent in all of this is to bring good judgment to bear from time to time based upon facts and circumstances which may exist at the time or times in question, and the Trustee should attempt to make decisions which the Trustee thinks I would have made under similar facts and circumstances. I realize that judgment is not a precise science, and that all decisions can be second-guessed. The Trustee should remember that the

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focus is on my children becoming well rounded, mature and contributing adults and it is their interests that should be focused on under the facts and circumstances that then exist. There is no arbitrary standard or rule of thumb which I can give you that would cover all situations that will arise. In the final analysis, there can be no substitute for sound judgment, exercised by well-meaning, caring and loving people concerned with the interest and well being of my children. I feel that it is important that my children feel good about themselves based on their own accomplishments and their own view of their self-worth. I believe that it can be demeaning for my children to have distributed to them a large sum of money or excessive monthly income before they have earned, through their own labors, a healthy degree of confidence in themselves and could, in the final analysis, be meaningless to them. It is this kind of result which I want to avoid, and to the extent this statement of intent will give the Trustee guidance, it is offered. This is done even though I know that the Trustee will not know with any degree of certainty whether their decisions are “right” until after the fact; however, I have confidence in the judgment of the Trustee and that it will always be exercised in the best interest of my children.

“AVOIDING ESTATE PLANNING REGRETS: CASE STUDIES FOR FORMATION AND CORRECTION” From: 2012 ANNUAL ESTATE PLANNING INSTITUTE, FEBRUARY 8, 2012, Mary B. Galardi, Galardi Law

CONSIDERATION OF OTHER RESOURCES SAMPLE TRUST PROVISION In determining whether to make discretionary distributions of net income or principal to a beneficiary, the trustee may consider such circumstances and factors as the trustee believes are relevant, including the other income and assets known to the trustee to be available to that beneficiary, including funds which might be made available by enforcement of the legal obligation of any person to furnish support or education, and the advisability of supplementing such income or assets, the tax consequences to the beneficiary of requiring the beneficiary to rely first on his or her own assets, and the tax consequences of any such distribution. SAMPLE TRUST PROVISION The primary purpose of the trust is to maintain a reserve fund to provide for the health, support and education of my descendants in situations in which all other assets and sources of income available to a descendant of mine are insufficient for those purposes. SAMPLE TRUST PROVISION The primary purposes of the trust are (i) to provide for the health, support and education of the child for whom the trust is named, and (ii) to avoid use of the trust property in a manner that might impair the desire of the child or a descendant of the child to be self-sufficient. I intend for the trustee to distribute trust income and principal to the child or his or her descendants on a selective and considered basis, my concern

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being that the child or the child's descendants may receive too much rather than too little. “USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite

EQUALIZATION REQUIREMENTS SAMPLE TRUST PROVISION The trustee may make unequal distributions to the descendants of the child or may at any time make a distribution to fewer than all of them, and shall have no duty to equalize those distributions. SAMPLE TRUST PROVISION Any distribution (i) to a child for graduate or professional education, (ii) to permit a child to enter into or engage in a business or profession, (iii) to permit a child to make a downpayment on a personal residence, or (iv) to defray wedding expenses of a child, shall be charged as an interest-free advancement against the share, if any, distributable to that child or descendant of that child under [later provisions of the trust agreement]. “USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite

PRIORITY AMONG BENEFICIARIES SAMPLE TRUST PROVISION My spouse shall be accorded clear first priority, and my children second priority (particularly those under age 25). SAMPLE TRUST PROVISION My primary concern during the life of the child is for the child's health, support and education and the trustee need not consider the interest of any other beneficiary in making distributions to the child for those purposes under this paragraph. SAMPLE TRUST PROVISION My primary concern during the period described in this paragraph is for the health, support and education of my children and the descendants of a deceased child of mine, rather than for the preservation of principal for ultimate distribution to my children or their descendants.

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SAMPLE TRUST PROVISION My primary concerns during the life of the child are to preserve trust principal for ultimate distribution to the child's descendants while at the same time reasonably providing for the health, support, education and best interests of the child. “USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite

AGE TRIGGERS V. DISCRETIONARY

TERMINATION SAMPLE TRUST PROVISION If at any time the trustee believes that it would be in my child's best interests and determines that it is otherwise appropriate under the circumstances, it may in its absolute discretion distribute to him the entire principal of his trust and terminate his trust, without regard to the interests of remaindermen. My child shall have no right to require that the trustee make any distribution that is not subject to an ascertainable standard, and the trustee is expressly exonerated from all liability to my child and all other interested parties by reason of the exercise or non-exercise of its discretionary authority in such matters. “USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite SAMPLE TRUST PROVISION

(F) Special Purpose Discretionary Distributions. The Trustee may also distribute to, or for the benefit of, the beneficiary a portion of the income or principal upon the happening of various significant events in the beneficiary’s life, including the following:

i. to enable the beneficiary to marry;

ii. to enter into a trade, profession or business;

iii. to purchase a home or for similar purposes;

iv. Attainment of age 25 (with the suggestion that one-third of the remaining trust estate be distributed to the beneficiary);

v. Attainment of age 30 (with the suggestion that one-half of the remaining trust estate be distributed to the beneficiary);

vi. Attainment of age 35 (with the suggestion that the remaining trust estate be distributed to the beneficiary); or

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vii. Any other event deemed by the Trustee to be significant.

A beneficiary will not have any enforceable right to a distribution upon the happening of any of the events set forth in this paragraph (including reaching the ages specified). The decision whether to make a distribution (and the amounts to be distributed) will be made by the Trustee in the Trustee’s discretion based upon what the Trustee believes to be in the beneficiary’s best interests (including the beneficiary’s financial circumstances and solvency), although it is my expectation that the Trustee will follow the guidelines set forth in this paragraph unless there are good reasons not to do so. “AVOIDING ESTATE PLANNING REGRETS: CASE STUDIES FOR FORMATION AND CORRECTION” From: 2012 ANNUAL ESTATE PLANNING INSTITUTE, FEBRUARY 8, 2012, Mary B. Galardi, Galardi Law

TRUST PROTECTOR

SAMPLE TRUST PROVISION All decisions relating to the use of the Trust income or principal shall be in the sole discretion of the Trust Protector. Any beneficiary who challenges a discretionary decision of the Trust Protector shall forfeit that beneficiary's interest in the trust; unless a court of competent jurisdiction, or licensed arbitrator rules in favor of the beneficiary. SAMPLE TRUST PROVISION The Trust Protector shall have no affirmative duty to act at all and no duty or responsibility to monitor the actions of the Trustees or the investment performance of any trust. The Trust Protector shall have no fiduciary responsibility to any beneficiary, and shall not be held accountable for any action or failure to act under this agreement. “USE AND ABUSE OF DISCRETIONARY DISTRIBUTION POWERS” From: 2001 CTFA CONTINUING EDUCATION SEMINAR, MAY 24, 2001, Thomas W. Abendroth, Schiff Hardin & Waite SAMPLE TRUST PROVISION

12.1 Designation of Protector. I appoint ________________ to serve as Trust Protector of the trusts created by this agreement.

12.2 Subsequent Trust Protector. The Trust Protector may appoint any one or more individuals (other than me, my wife, my children or any descendant of my children) as successor Trust Protector. Any appointment of a successor Trust Protector shall be in writing, may be made to become effective at any time or upon any event, and may be single or successive, all as specified in the instrument of appointment. The Trust Protector may revoke any appointment before it is accepted by the appointee, and may

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specify in the instrument of appointment whether it may be revoked by a subsequent Trust Protector. In the event that two or more instruments of appointment or revocation by the same Trust Protector exist and are inconsistent, the latest by date shall control.

12.3 Resignation of Trust Protector. Any Trust Protector may resign by giving prior written notice to the Trustee. All trusts created by this agreement need not have or continue to have the same Trust Protector. The provisions of this agreement that relate to the Trust Protector shall be separately applicable to each trust created by this agreement.

12.4 Powers of Trust Protector. The Trust Protector may, with respect to any trust as to which the Trust Protector is acting, modify or amend: (A) The administrative provisions of the trust relating to the identity, qualifications, succession, removal and appointment of the Trustees; (B) The terms of any trust with respect to (a) the identity of the trust's beneficiaries, [be very careful using this] provided, however, that the Trust Protector may not make the Trust Protector, the Trust Protector’s spouse or the Trust Protector’s descendants, the Trust Protector’s creditors, the Trust Protector’s estate or the creditors of the Trust Protector’s estate as a beneficiary of this trust; (b) the purpose for which the Trustees may distribute trust income and principal, and the circumstances and factors the Trustees may take into account in making such distributions; or (c) the termination date of a trust, either by extending or shortening the termination date (subject to the Rule Against Perpetuities).

12.5 Limitation on Powers. The rights and powers conferred on the Trust Protector, including, without limitation, the power to remove trustees and all rights and powers granted the Trust Protector in Item 12.4 shall be exercisable only in a fiduciary capacity.

12.6 No Power of Appointment. Notwithstanding any other provision of this trust agreement, the Trust Protector shall not participate in the exercise of a power or discretion conferred pursuant to this trust agreement that would cause the Trust Protector to possess a general power of appointment within the meaning of Code § 2041 and § 2514.

12.7 Release of Powers. The Trust Protector, on his or her own behalf and on behalf of all successor Trust Protectors, may irrevocably release, renounce, suspend, cut down or modify to a lesser extent any or all powers and discretions conferred to the Trust Protector by this agreement by delivering a written instrument to the then-acting Trustee. “AVOIDING ESTATE PLANNING REGRETS: CASE STUDIES FOR FORMATION AND CORRECTION” From: 2012 ANNUAL ESTATE PLANNING INSTITUTE, FEBRUARY 8, 2012, Mary B. Galardi, Galardi Law

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