Walt Disney built a fortune giving the world what it wanted: a fairytale ending. But his personal legacy has been far from that, thanks to a poorly written trust that’s been tearing his family apart for years.
Set up by his daughter Sharon, with her three kids as beneficiaries, proceeds from the $400-million trust were to be distributed incrementally among them at ages 35, 40, and 45.
There was one notable caveat: money could only be given if the trustees, which include Sharon’s ex-husband and her older sister, believed a child showed the “maturity and financial ability to manage and utilize such funds in a prudent and responsible manner.”
The trustees exercised their power with monumentally uneven results. Not only did they refuse to give one son his money, they awarded a full inheritance to a daughter with a history of drug addiction and a brain condition that left her mentally incapacitated.
They gave money to another daughter who’d also struggled with addiction, and who died of a drug overdose at 35—within a year of getting her first disbursement.
Read: The importance of post-mortem planning
The Disney case is a headline-grabbing example of how not to set up a trust.
And while not every trust dispute is an epic battle, the case contains important lessons for anyone looking to set up a trust, says Lynne Butler, a St. John’s, Nfld.-based wills and estates consultant.
In fact, one of the biggest holes in the Disney trust was the vague criteria upon which trustees were expected to make decisions. How do you define “maturity” or “financial ability,” and how can these terms be used as rationale for giving money to one child and not another?
“When you have a discretion in a trust and it’s not properly described, that can lead to lawsuits and family members fighting each other,” says Butler.
In one of her client cases, a wealthy mother used a trust to leave money to her son while giving her daughter money outright, with no strings attached. “People equate that with parents’ feelings, so being treated differently than a sibling is emotional,” says Butler who adds the unequal treatment ruined the relationship between the brother and sister.
That’s why the choice of trustees is one of the most important decisions clients can make. Ian Hull, a Toronto-based trust and estate lawyer with Hull & Hull LLP, says “it should entirely be a business decision. You need someone qualified who’s going to be around—someone who is able to stand up to heavy pressure from beneficiaries and make tough decisions.”
Read: Is that trust resident, or non-resident?
Hull also says clients should choose more than one—ideally two or three. And it has to be someone they trust implicitly to make the right decisions. He advises clients go with a professional trust company, or professional lawyers who act as trustees. These experienced outside parties are better able to be impartial.
The Walt Disney case is one example of how not to set up a trust. Pictured: Walt Disney and his family en route to England on June 15, 1949.
Creating a trust
Not all examples of badly structured trusts are as dramatic as the Disney case. More often, the challenge is simply the changing needs and lives of the beneficiaries. For instance, a trust could’ve been set up to pay for post-secondary education, but then the beneficiary chooses not to take that path.
How can advisors help clients ensure a trust is set up to do what it’s intended to do? By asking potentially awkward questions.
Butler recalls a client who wanted to set up a trust for his five daughters to ensure each one got a $10,000 wedding gift. He didn’t like it when Butler asked him what would happen if it was a second or third marriage, but she knew she had to bring that up.
In another case, Hull was helping a local entrepreneur who put his company in a trust with his wife and kids as the beneficiaries. All good—until the client’s marriage broke down. He needed Hull’s help to fix the problem. Hull recommended that, since the terms of the trust were flexible, his client could split the trust between all the beneficiaries, and buy out his wife’s share.
Read: 3 tricky trust rules
He adds, “I run into scenarios all the time where the spouse hasn’t organized an exit plan should the marriage end.” An exit plan should be part of a prenuptial agreement or marriage contract, which outlines what should happen in the event of a divorce.
5 tips to set up an accurate trust account
- Be flexible. Whether it’s a trust meant for school fees, or to help buy a home, people’s needs change. Your client’s child might grow up and decide not to go to university, or get married. What happens to the money then? Avoid this situation by making the trust flexible enough that the beneficiary can use the money if his life takes a different path.
- Get the trustees right. Help your client choose more than one and encourage him to make it a business decision, not an emotional choice. Don’t presume you have to use family members; choose people who can make unbiased decisions, such as a professional trustee or a lawyer who acts as a trustee.
- Ask awkward questions. Divorce, death, and dropping out of school—a lot can happen to derail your client’s best intentions. You need to cover various scenarios to ensure she’s clear on what should happen when things don’t go as planned.
- Remember, fair and square is impossible. Make sure the trust is set up to benefit those who really need the help. Equal distributions might not make sense if your client has a child with a disability, for example. And make sure clients discuss it with family members ahead of time, so they know and understand your client’s rationale.
- Don’t think too far ahead. Clients should revisit trusts every few years or when a major life event happens (e.g., death or divorce). And some people design trusts for many generations, even when there’s not much money. Remind them it’s often better to have their chain of heirs end at the next generation.
Fixing a bad trust
A trust should clearly express the wishes of the people who set them up, but that doesn’t always happen. So what can you do if your client ends up with an ill-written trust?
Start with the trust document itself. Fiona Hunter, a partner with Horne Coupar in Victoria, B.C., says to look closely to see if it contains a power to amend. If not, see if there is a power to advance, which lets the trustee advance capital for the benefit of the beneficiary. “You may be able to use that power to resettle funds in a new trust or sub-trust, so that you include more flexibility in that new trust or sub-trust,” she advises. It’s important to seek tax advice before doing so, she adds, because it’s possible to inadvertently trigger a disposition of the trust property when resettling.
If there was an error in the trust document—for instance, there was a power that was supposed to be included, but it wasn’t—an heir can seek rectification through the courts. The beneficiary will try to prove the trust doesn’t accurately reflect the intention of the person who set it up.
Hunter says this means looking for information about how the deceased wanted the trustee to exercise discretion. Usually, this is found in a statement of wishes or additional information from the lawyer who drafted the will or trust. That can be challenging, since the lawyer will have a duty of loyalty to the client and may not share that information.
Read: The changing landscape of testamentary trusts
Heirs can also ask the courts to vary (make changes to) a trust, but “those statutory provisions are different in each province, and generally speaking, are somewhat restricted,” Hunter says. “It’s a very limited power.” Going through court does mean added costs. Depending on how complex the case is, it can end up costing between $25,000 and $200,000, says Hull, noting it can be worth it when the endgame is “getting the noose of a bad trust off a family’s neck.” To figure out whether it’s worth it, beneficiaries need to look at how much it will cost relative to the size of the assets in the trust, and the distributions they’re expecting to receive in the short-, medium- and long-terms.
And beware: along with the legal costs, there could be a big tax hit, particularly for clients who’ve set up a trust for a minor: all taxes on interest accumulated in the trust are charged to the person who set it up until the beneficiary hits the age of majority. The tax hit is paid out of the trust assets or, if the rest of the estate has been wound down, executors will have to hold back money to pay the tax bill on the trust.
However, if a trust is challenged after the person who set it up dies, Hull says there shouldn’t be any major tax consequences because the repaired trust would operate in the same way.
Still, it’s better to get a trust right the first time. Advisors must help clients think longer-term about their needs and what kinds of life changes could derail their best intentions.
5 benefits of alter ego and joint-partner trusts
by Frank Di Pietro, director of tax and estate planning, Mackenzie Investments.
- Minimize estate administration tax/probate fees: Alter ego and joint-partner trusts do not form part of a client’s assets on death because he or she is not the legal owner of those assets at that time. As a result, probate fees (or estate administration tax) are not payable on the value of trust assets on death.
Up to now, the use of alter ego and joint-partner trusts to avoid probate has been limited because income-tax savings available to heirs through graduated-rate testamentary trusts generally far exceed the value of probate savings. With the loss of graduated rates, clients may want to consider alter ego and joint-partner trusts, which have positives that go beyond eliminating the expense, time delay, and frustration of probate procedures.
- Privacy: Unlike a will, which becomes a public document if probated, alter ego and joint-partner trusts allow client affairs to be kept private. This can be particularly valuable for wealthy people who wish to keep the value of assets, as well as the recipients, confidential.
- Protection against legal claims: Beneficiaries (or those who feel they should be beneficiaries) may challenge a will if they feel they have not been treated fairly. With an alter ego or joint-partner trust, there is no will to contest and therefore, little opportunity to challenge the distribution of assets. Therefore, alter ego and joint-partner trusts may allow clients to avoid dependant’s relief legislation by disinheriting close relatives who may otherwise obtain relief by challenging a will.
- Speedy distribution of assets: The probate process can be lengthy, causing the distribution of estate assets to take months, or even years. With an alter ego or joint-partner trust, trustees will already be the legal owners of the trust property and can proceed to distribute the assets soon after the client’s death.
- Effective management during incapacity: Alter ego and joint-partner trusts may eliminate the need for powers of attorney. If a client loses mental capacity, the trustee (or contingent trustee) will already have control of all decisions and can simply continue with her duties. This allows clients to maintain continuity in the management of trust assets.
by Caroline Cakebread, a Toronto-based financial writer.