Thick vs. Thin Trusts
More than ten years ago, I attended a nearly three-hour continuing legal education session devoted entirely to the 187 changes to trust law from the previous year. That may sound like an important program for estate planning attorneys, and technically it was. In practice, it was one of the most boring and baffling legal sessions I had ever attended. Why?
The speakers went through the changes one at a time, carefully explaining what the new law said and how trustees were expected to respond. But after the first few examples, I began noticing a pattern. Over and over, the explanation started with some variation of, “Well, if the trust does not specifically say how this issue should be handled, then the law says the trustee must handle it this way.”
That same basic explanation came up 185 out of 187 times.
I never raised my hand to ask the question that was running through my mind, but I thought it every single time: Why doesn’t your trust template already address that issue the way your clients generally want it handled? That’s how I thought estate planning attorneys and firms were supposed to develop their revocable living trust templates to ensure they are protecting their clients.
Apparently not. Apparently, most attorneys want the government to fill in most of the trust terms they are presenting to their clients rather than take the time to draft what is specifically in their best interests.
The remaining two changes were different. They involved temporary tax breaks that had to be specifically referenced in a trust if someone wanted to take advantage of them. I remember one was about a three-year tax break for owners of fish hatcheries, and it was going to expire in a year and a half.
A few days after the seminar, I had some extra time and decided to see how my trust templates stacked up against the “recommended” trusts from the NC State Bar Association that would need all of this legislative and statutory clarification when it could have just been drafted into the document.
My standard revocable living trust templates had all 185 out of 187 issues addressed as a standard. Other than the two weird temporary tax breaks, there was no need to change my templates.
As a side note, this is when I decided to attend as few continuing legal education courses as possible to stay compliant and instead get the vast majority of my CLE hours by teaching at national conferences and conventions.
That experience reinforced something I had already believed for years: there’s a major difference between a thin trust and a thick revocable living trust. The difference isn’t just the number of pages. It’s who controls the terms of the trust, who answers the unanswered questions, and how much authority the family has unintentionally handed over to the government. With all of the trusts I review that are severely “under-drafted,” a couple might as well make the government a third Trustor and Trustee with them.
What Is a Thin Trust?
Trust law generally prohibits a few certain things and requires a few basic terms, but most of the important rules governing a trust are left to the trust document itself. The law may establish minimum standards, define certain duties that have to be included, and prevent provisions that violate public policy.
Beyond those limitations, the trust can provide its own detailed instructions on how the trustee manages property, makes distributions, handles investments, accounts to beneficiaries, resolves disputes, and administers the trust after the Trustor becomes incapacitated or dies.
A thin trust is generally twenty pages or less that leaves most of those questions unanswered. Instead of spelling out the trustee’s powers, responsibilities, procedures, and limitations, the document relies heavily on state trust law to fill in the blanks. The trust may appear easier to read because it’s shorter, but much of the actual operating language is simply located in the state’s statutes, appellate court decisions, administrative rules, and other legal authorities governing trusts. The family may receive a twenty-page document, but the trustee is effectively administering a trust that also incorporates hundreds or thousands of pages of law that were never placed in the
document.
The trust isn’t shorter, just weaker, because most of its terms have been outsourced to the government.
A Trustee Should Be Able to Read the Trust
One of the major advantages of a detailed revocable living trust is that the trustee can usually read the document, get through interpreting some of the legalese, and then determine what he or she is authorized to do.
A well-drafted trust should explain in detail how property may be invested, when money may be distributed, what records must be maintained, which expenses may be paid, how successor trustees take over, and how the trustee should respond to all but the weirdest administrative issues.
A thin trust doesn’t provide those answers. When a question arises, the trustee has to look up the law or pay the drafting law firm or another trust attorney a hefty hourly rate to look that up for them. That isn’t simplicity. It’s deferred complexity and a cash machine for thin-trust law firms.
The Government Becomes an Uninvited Trustor
The person creating a trust is commonly called the Trustor, Grantor, or Settlor. The person who runs the trust is called a Trustee. My clients are generally holding both roles while alive and competent. They decide how the trust should operate, who should serve as trustee, who should benefit from the assets, and what rules govern trust administration. But when a trust leaves most of those rules unstated, the government effectively becomes another Trustor and Trustee. The government fills in all of the missing terms, determines the default procedures, and decides what the trustee may or may not do. The Trustor signed the document, but what the attorney didn’t draft into the trust document is written in by the government.
Those government rules can also change. A provision that applies today may be changed during the next legislative session. The change may be based on a legitimate effort to modernize trust law, or it may reflect pressure from banks, insurance companies, professional associations, lobbying groups, or major political donors.
Regardless of the reason, the family’s trust may operate differently year to year because the government changed a default rule that the trust document never addressed.
When my firm prepares a revocable living trust, we want the client’s instructions and best interests to control as much as possible. State law will always provide some of the broad legal framework, but it should not be invited to write all of the major portions of the family’s estate plan.
Thick Trusts Provide More Complete Instructions
The revocable living trusts we use are relatively thick because they address as many of the potential issues that may arise when a trust is being administered. There are a lot of clauses and sections that may never arise for many of our clients, but the language is there just in case. When we put together a trust to protect our client’s wishes, we are also anticipating how more than 99% of our clients would want something handled and draft that in.
The detailed trust we use addresses trustee powers, investment authority, real estate transactions, business interests, retirement accounts, distributions for beneficiaries, incapacity procedures, accounting requirements, successor trustees, creditor concerns, tax elections, and many other practical matters. Many provisions may never be used, but they are available if the issue arises. And each of those provisions is detailed.
For example, I never knew what the word “hypothecate” meant until I drafted in some specific language I found and looked it up. Basically, it means “to mortgage” but some mortgage company out there probably denied a mortgage attached to property inside a trust because it didn’t have the term “hypothecate” in the trustee powers, so now it’s in our templates in case that same mortgage company ends up interacting with our clients.
The goal isn’t to create a document filled with meaningless legal language. The goal is to prevent unnecessary questions and avoid having state law control an issue simply because the trust was silent. Standard trust provisions should also reflect the choices most clients would actually make if the situation arose. When clients usually want trustees to have broad investment powers, the trust should say so in painstaking detail.
Clients usually want trustees to be able to sell property, hire professionals, manage businesses, settle claims, and make appropriate distributions without seeking court approval; the trust should provide that authority with as many terms and definitions as could possibly come up.
Why Restrict a Trustee You Chose?
Investment authority provides a good example of why detailed trust language matters. Some state laws can substantially limit the investment options available to trustees unless the trust grants broader authority. Depending on the law and the language of the document, a trustee may be restricted to using extremely conservative investments or avoid reasonable opportunities because of concerns about personal liability because the trust didn’t specifically authorize them to use a certain investment.
Most clients don’t choose a trustee at random. They select someone because they trust that person’s judgment, honesty, and ability to manage money for the beneficiaries. The trustee may be a responsible adult child, another family member, a trusted friend, or a professional fiduciary. It makes no sense to select someone because of their judgment and then turn around and restrict them to a narrow list of investment choices such as bank CDs and municipal bonds. Those investments may be appropriate in some circumstances, but they shouldn’t be the only choices simply because the trust language is weak.
If you don’t trust the types of investments your trustee would make, then choose a different trustee. Don’t just place a ton of restrictions on how they can do their job. Unfortunately, that may be just what you’re doing when the government is filling in the terms your attorney failed to draft into your trust.
Who Do You Want Writing the Rules?
When comparing revocable living trusts, don’t assume that the shortest document is automatically the simplest or best. Ask what the trust actually covers, which issues are left to government default rules, and whether the trustee will be able to understand the document without repeatedly hiring an attorney to interpret missing provisions.
A thick trust places more of the rules in the document where the Trustor, trustee, beneficiaries, and advisors can find them. It reduces the number of blanks filled in by the government and makes it more likely that the Trustor’s wishes, rather than changing laws, will control the trust administration.
To learn more about how revocable living trusts work and how they can be used as part of a complete estate plan, please review the free materials available at www.FreeTrustCourse.com.