Each person creating a trust has their own special goals for what they wish the trust to accomplish. A clear expression of these goals can have significant legal ramifications. There are two main ways a trustmaker can document their intents and purposes for their trust. Each approach has a slightly different purpose. Both are generally called a “statement of intent.”
Statement of Intent or Purpose within the Trust Document
The first approach is to include a statement of intent in the trust document. Michigan, along with many other states, generally follows the Uniform Trust Code (UTC) in requiring that a trustee administer a trust in accordance with its terms and purposes. Absent such a statement, a trustee may be uncertain of the trustmaker’s main goals for administration of the trust. A clear statement of intent within the trust will not only guide the trustee in administering the trust, but it can also determine whether a trust can be modified or terminated by a court. Michigan law provides, in part, that a court can modify or terminate a trust if the court concludes that the modification or termination of the trust is consistent with the material purposes of the trust or that continuance of the trust is not necessary to achieve any material purpose of the trust.
Some possible examples of a trust’s material purposes are:
- to eliminate or reduce estate taxes;
- to protect the trust assets from beneficiaries’ creditors or divorcing spouses;
- to educate trust beneficiaries in financial management;
- to provide for a disabled beneficiary; and
- to preserve the family home or cottage, regardless of the cost, so that your family can enjoy it for many generations to come.
The material purpose of a trust may vary widely, but the importance of documenting the trustmaker’s material purpose remains constant.
Language of intent or purpose in a trust document can also help beneficiaries understand the trustmaker’s goals and help to ease any hard feelings among beneficiaries, particularly if money and property are to be divided unequally or one beneficiary is to receive a unique piece of property or beloved family heirloom.
Letters of Intent Separate from the Trust Document
While you may know in detail how you want your estate planning wishes to be carried out, it is not always wise to include every detail in the trust document. It is often necessary to leave some discretion in the hands of the trustee to provide some flexibility in administering a trust and addressing the specific circumstances that are present at the time of administration. A trust may provide that the trustee can make distributions for the beneficiary’s health, education, maintenance, or support. Such a standard is significant for tax and legal purposes but may leave the trustee unclear as to what is actually desired by the trustmaker. Including more detail in the trust document could unreasonably restrict the trustee as circumstances and expectations inevitably change over time. A letter of intent could be very helpful in such a situation.
In general, a letter of intent is a nonbinding letter from the trustmaker to the trustee that guides them in exercising their discretionary powers. The letter should express, in the trustmaker’s own words rather than in legal jargon, the trustmaker’s goals and purposes. For example, should the trustee make distributions to the beneficiary any time the beneficiary asks? Even with the standards of “health, education, maintenance, and support”, does the trustmaker expect the beneficiary to first pursue adequate health insurance, a steady job, and other means of supporting themself?
A comprehensive letter of intent can assist the trustee in knowing what type of distributions are desired by the trustmaker. The letter can guide the trustee while not unexpectedly binding them to make distributions in ways that otherwise seem imprudent because of changed circumstances unforeseen to the trustmaker when they wrote the letter of intent.
Letters of intent can also guide a trustee when a trustmaker might have concerns about a particular beneficiary but does not want to detail such concerns in the trust document. To reveal too much in the trust document could prove embarrassing for the beneficiary and anyone else who reads the trust. Instead, the trustmaker could provide a separate letter of intent for the trustee. For example, if a trustmaker is concerned about their beneficiary son’s gambling addiction, instead of addressing the concern in the trust document, they might include in a separate letter of intent a statement such as “Do not give money outright to my son because I worry that he will simply gamble it away. I prefer that you make distributions on his behalf or for his benefit to those providing him with goods or services.”
Updating Your Purpose
As changes in your circumstances occur over time, you should regularly review your estate plan to ensure that it still accurately reflects your wishes. You should also regularly review any statements of intent within your trust document or letters of intent outside of your trust document to ensure that they, too, accurately communicate your wishes. If you are interested in learning more about including these statements or letters in your estate plan, please call us or schedule a meeting with us online.