There’s no such thing as a guaranteed “anything” in this world, and the same certainly holds true for family wealth in the trust world. There is no guaranteed inheritance.
Even when your family is crazy rich.
Even when there is a FAMILY FORTUNE in trust for family members.
Every trust lawyer knows that. Why? Because too much “stuff” can happen. And I’m not talking about trust investments losing money or getting wiped out. No, I’m talking about you expecting to get an inheritance from a family trust when your dad dies. But you don’t. File this one in the chapter called “This Could Happen to You.”
Consider this: your grandmother is very, very wealthy. She and your grandfather, who has been dead for years, were industrialists, or invented some obscure component to airplane engines or odd machinery. You know, the type of product that no one has ever heard of, but is used every day across the country. The kind of product that doesn’t make people rich; the kind that creates FORTUNES. Regardless, grandmother is filthy rich.
You grew up in a cushy lifestyle because your dad had a small trust fund and your grandmother paid your prep school and tuition bills. You and your siblings attended the finest prep schools from Exeter to Choate to Deerfield, and went on to upscale private colleges in New England. You’ve landed in Chicago or Manhattan or Boston, where your rent consumes most of your paycheck, but grandmother sends you a check each January, which she has described as “gift-tax-free.” These annual checks of $10,000-$13,000 a year help, but big city living is expensive. Your American Express Platinum bill from the restaurants you go to with your prep school friends runs more than it should. Thank God for the family’s wealth, right?
Although your grandmother has only mentioned it in passing, your dad has said on a number of occasions that “we all inherit” when grandmother dies. You don’t know the specifics, but your siblings and cousins have said that a huge family trust was created when your grandfather died. It’s for the family.
You wonder how many millions were set aside for you in the trust, and if grandmother even left you a little extra, since she found you so adorable when you were just a child, and you visited her down the Cape or in the Hamptons during the summer. Of course, that was 30 years ago for you and three divorces ago for your dad. And God knows that you haven’t called grandmother in some time, let alone send her cards or flowers on her birthday, but she understands that you are busy. Doesn’t she?
Dad wasn’t as ambitious, or as financially savvy, as his mother or father had been, so dad blew through that “little” trust by his third divorce. No inheritance for you? Not from dad, but grandfather created a huge family trust. Huge! Like $100 Million huge. And it’s for grandmother’s family: her descendants, her heirs. And you are one of her favorites, aren’t you? Not to worry.
You’re in, right? No need to really push yourself, correct ? You just wait your time and the money will flow in from the trust. You are patient. Self assured. Confident. No one would disinherit you, right? Especially family.
Grandmother dies. You are disgusted that your cousins, two aunts, and one uncle are talking about the family money at the funeral, including your dad. In the limo! At the gravesite! “Disgusting” you think.
One of your cousins gets a copy of the trust and it starts circulating among the family. And while you have not completely read it, let alone understand the terms of the trust, you do know that you inherit after your dad dies.
Here’s how it all goes wrong, terribly wrong.
The trust is smaller than you think. Sure, it was over $100 million when it was created by grandfather, but that was a couple of decades ago. And while that $100 million should have increased gradually over the years, there were significant out flows and decreases in value. His estate paid significant estate taxes. Even with great insurance and health plans, grandfather needed round the clock nursing which was costly the last few years of his life. When he was gone, grandmother travelled the world, while maintaining homes in the Hamptons, Palm Beach, Vail and France’s Cote de Azur. Their upkeep and maintenance were costly. Instead of those real estate gems appreciating greatly, the family trustee suggested liquidating them and raising cash. So, three of the real estate properties were sold during 2002, when the markets were reeling after the “tech wreck.” After paying capital gains tax there was not as much as had been hoped for. Then grandmother grew sick and her round the clock care got expensive, very expensive. Major setbacks to the trust portfolio occurred during the Great Recession. But not to worry, there’s $70 million in the trust. Enough for everyone, right?
Except that after grandmother’s death, two things happen that you and your siblings and cousins are all upset about — and never even imagined could happen.
First, grandmother exercised some “power of appointment” over the trust by donating, upon her death, $20 million to the local community foundation. She appointed, or gave away, $20 million to a charitable fund set up in her name that is the largest single gift of money in the history of this community foundation. The trust lawyer says this was permitted by the terms of the trust. She says that your grandfather gave her a power of appointment that was exercisable at her death and that permitted grandmother to appoint some or all of the trust to a charity or family members of her choice. You and your cousins find this ironic, that grandmother, while suffering from an early onset of dementia, gave away a chunk of the family’s wealth to, well, create grants for the study and cure of dementia. Your siblings wonder if grandmother was demented at the time she signed her will which exercised the power of appointment. While your grandmother is remembered by her community, and posterity, as a generous woman, the family trust just lost $20 million, which you and your cousins view as YOUR MONEY. After paying estate taxes and after the $20 million gift to charity, the trust is split four ways: into separate trust shares, one for each child of your grandparents. Your dad gets a share, as does his two sisters, and one brother. Wow, you think, thank God there’s at least $30 million left in the trust.
Except that you learn that your grandmother also exercised her power of appointment by giving away $10 million to your cousin Libby. Libby, the social worker who eschewed the clubs and hotspots of the cities and summer haunts of the rich and famous for small town civic, social, and charitable work. But Libby didn’t just spend time helping the less fortunate. She also was grandmother’s favorite. She called often, visited grandmother, sent cards and flowers, and always was there on holidays and birthdays. Now the trust is down to $20 million and your father’s share is only $5 Million. The trust lawyer tells you two things: first, you can only inherit from your father’s share and not from the shares for your aunts or uncle since their shares go to their kids. You only inherit from your father’s trust share, that is, if there’s any left. Two, she recommends that each of you get your own lawyer since she represents the trustee and not any individual beneficiary. Why in the world, you wonder, would you need a trust lawyer over a family trust?
Dad’s trust share can only be distributed for his benefit during his life, for his health, education, maintenance, and support. Dad submits a budget and wants $250,000 a year, which you find high; especially considering that you want some money but are told you can’t get it until Dad dies. You feel frustrated, disappointed, even a bit angry that YOUR family trust is not being used for your benefit.
Then comes the sad news one day that your dad unexpectedly dies. After the funeral, the trustee’s attorney tells you that there was an occurrence that you will find “unsettling.” “What now?” you think. More investment losses? Can’t be, the markets on fire, setting new highs. Is dad’s 30-year-younger-than-he girlfriend making a claim to the trust? Not to worry, you think. After all, you already discussed this with the trustee’s attorney and she assured you that non-family members have no claim to the family trust and that the trust, under no circumstances, would go outside the family. So, what now?
Just three weeks prior to his death, you learn that your father legally adopted his much younger girlfriend. What? Your 64-year-old father adopted his girlfriend who is six years younger than you? What does this mean.
“Just like your grandmother,” the trust attorney begins, “your father had a power of appointment to appoint, or give away, his trust share to his descendants at his death. Your father exercised that power of appointment and gave his trust share to his girlfriend, who, after the adoption, is now a descendant.”
“You and your siblings don’t inherit anything.”
John Pankauski is a West Palm Beach, Florida probate and trust litigation attorney.