A trust is usually intended to be regarded as an instrument with a longer term than that of a will. Additionally, a trust can be designed to promote the settlor’s own values, such as particular financial and social responsibilities or a certain level of work ethic.
For instance, the settlor might also choose to prioritize benefits such as health and education. A consummate estate plan will take all the defined objectives into account while also trying to minimize conflict that could potentially arise among beneficiaries.
Reading the tea leaves
It is possible that trustees will face a quandary. As time passes, circumstances will likely change, meaning they could have shifted since the time the trust was settled. Furthermore, when the settlor is no longer alive, trustees will be tasked with the duty of making all sorts of decisions, such as whether to make distributions from the assets within the trust.
However, challenges could arise if the formal trust language is vague or ultimately does not pertain to the current situation. A side letter of intent, which in and of itself is never binding, can help provide context for trustees as a way of helping them determine what the settlor might have expected or intended.
Trust documents tend to be cut and dried, meaning a trust agreement does not usually convey the history, intentions, future contingencies or details of private information that could collectively create a full picture of the settlor’s desires. So there is often a lot of room for interpretation.
Also, the nature of trusts has evolved over the years. Historically speaking, the original purpose would have been to protect the family wealth from the behavior of profligate or irresponsible beneficiaries. That said, modern-day trusts are most likely structured for the sake of tax-related reasons.
Contents of the letter
There is not a sole exemplary way to write a side letter. Even so, the letter should be written in plain and comprehensible English. The letter may be stored along with the will, although they should not be attached to one another. It must not be witnessed the way a will must be, as this could result in any contenders trying to claim that the letter constituted part of the will at a later point in time.
But what does the communication aspect entail? Typically, details regarding what to consider as being permissible requests for distribution should be included. These could cover a wide range of purposes, ranging from launching a business, purchasing a house or traveling around the world to enrolling in educational opportunities, gifting charitable donations or utilizing funds for reasons pertaining to special needs.
The letter may also restrict certain types of distributions. For example, it may omit beneficiaries who have demonstrated patterns of substance abuse or exhibit gambling addiction.
The letter of wishes might also specify detailed instructions and explanations. For instance, some settlors will describe exactly whom to notify of their death while also defining their preferences for funeral services, including musical choices and floral arrangements.
Some settlors might also list their main assets or reveal their passwords to an array of protected accounts. Settlors sometimes even express how they would like their children to be raised in terms of religious or educational paths.
Would the settlor like to use distributions as a way of marking significant milestones, like family wedding anniversaries or birthdays? What is the role that any family businesses play? Should they be retained or sold? The letter may also expand on other medical directives or end-of-life guidance.
A safety valve
A side letter can provide trustees with defenses that will head off any and all legal challenges. It may substantiate the settlor’s state of mind and support trustees’ behavior should their actions ever be questioned.
The letter also serves as a confidential channel whereby a settlor can discuss sensitive and private information. It can also elaborate on why the settlor may have excluded a beneficiary or reduced their share.
However, it is essential that the letter is not interpreted as being part of a will or as a codicil. Otherwise, it may become legally discoverable to various beneficiaries, which would allow them to access it. Furthermore, it is critical to clarify that the letter is nonbinding in regard to the trustees, so a settlor must be sure to select those who are reliable and trustworthy.
An attorney should always review side letters to ensure that they do not contain any inconsistencies or pose conflicts with other trust and estate documents. A lawyer with experience handling trusts, estates and all related accounts can make sure there is no language within the letter that could potentially be misconstrued as an estate instrument.