Caution! Exponential Growth Ahead

Ooops_2016-03-23_1709I’ve been attending a continuing education webinar on drafting trusts. Very interesting. There is so much you can do with trusts, so many avenues to make sure your wishes are carried out when you’re no longer with us or become incapacitated. Among other things, as with a will, you can make specific distributions to specified people or classes of people in your trust. So you can give your record collection to Bobby, “because he’ll appreciate your taste in music,” your old Colt revolver to Mary, “because she has always loved the West,” and so on.

And you can give cash, and this is where a problem can arise. Suppose the trust says that grantor–the maker of the trust–wants “to give $10,000 to each of my grandchildren on the day each turns 21.” See any problems with that? How about if at the time the trust was drafted the grantor had just five grandchildren. See any problems now? Sure, that’s a $50,000 bill, but the grantor probably knew that when he created the trust.

How about 20 years later? The grantor has just died, and his youngest child just gave birth to triplets, which brings the total number of grandchildren to 20. Now do you see a problem? That $50,000 bill has grown to $200,000. Do you think the grantor had that in mind when he signed his trust?

That’s the problem with specific distributions to a class of people rather than to specific people. If the class continues to grow, so does the gift. Thus, dear potential (or actual) grantor, if you have or are considering making a class gift, make sure you’ve thought well into the future and/or make sure your trust is drafted in such a way that your upside is capped. Otherwise, your gift could grow exponentially, and there may not be enough room at the inn to fulfill all of your promises.

 

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