In Stepmom We Trust? Protecting Beneficiary Interests through Proper Drafting

At Altman & Associates, we plan for families of all shapes and sizes.  Planning is especially important for blended families, where divorce and re-marriage can lead to unique and delicate legal relationships between former spouses or partners, new spouses or partners, and children from prior and current unions.  A well-crafted, individualized plan can help ensure that a person’s legacy benefits those intended and will minimize the possibility that an “evil stepmom” will drain her stepchildren’s inheritance, or that a second wife will benefit from a former wife’s hard-earned estate.  But there is a bottom line.  The best plan in the world is worth nothing if it is not carefully drafted, as illustrated by Illinois case, Carter v. Carter, 2012 Il. App. (1^st) 110855 (Feb. 7, 2012).

Luther Carter, Jr. used estate planning to provide for his wife, Audrey, and his daughter, Tiffany, who was not borne of their marriage.  His plan created three trusts, all of which benefitted Tiffany and one of which simultaneously benefitted the stepmother, Audrey.  Can you guess which trust caused the chaos?  Yep, it was the Marital Trust, a QTIP trust established to provide income to Audrey throughout her life while leaving Tiffany with the principal upon Audrey’s death.  Acting as trustee, Audrey invested the entire principal in municipal bonds.  Great plan for Audrey – bad plan for Tiffany.  The bonds benefitted Audrey by providing stable interest payments but they did nothing for Tiffany’s interest in the principal.  In fact, the strategy even hurt Tiffany, as inflation apparently caused the value of the principal to decrease by about $300,000.

Among other arguments, Tiffany claimed that Audrey breached certain duties that a fiduciary, like a trustee, is usually required to assume:  The duty of impartiality, the duty of prudence, and duty prescribed by the Illinois Prudent Investor Rule.  The duty of impartiality meant that a trustee should be impartial to the beneficiaries when managing a trust.  On its face, the trust did not express whose interest reigned supreme, but because the Court found that Audrey’s actions were consistent with Luther’s inferred intent, Audrey was not culpable.  Furthermore, while the Illinois Prudent Investor Rule required that a trustee’s investment strategy consider both income production and capital retention, and while Tiffany argued that the duty of prudence promoted diversification of trust assets, the Court found that Tiffany breached neither duty and instead acted reasonably.  Significant to the Court’s decision was language in the trust giving Audrey the right to invest without diversification.

Tiffany lost out on this one, but her struggle illustrates a few important points:

• First, proper drafting is key!  A trust can be drafted to indicate whether all beneficiaries should be treated equally, or whether one or some beneficiary interests outshine others.
• Second, trust law is jurisdiction-specific and while state statutes and case law prescribe applicable fiduciary duties, such default rules may not apply when trust language indicates otherwise.  For example, while the Code of Maryland prescribes “Guidelines and standards for investment of assets” that may apply to a fiduciary in his role, the statute explicitly states: “To the extent that any provision of this section is inconsistent with the terms of a governing instrument, the terms of the governing instrument shall control.”  Estates & Trusts § 15-114(d).
• Third, remember that there are a number of wonderful ways to plan for blended families, and QTIP or Marital Trusts can be great tools, when used properly.

Call us at (301) 468-3220 or email us at liz@altmanbackup.peakperformance.dev to learn more.

-  Gary Altman, Esq. and Coryn Rosenstock