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by Michael T. Palermo, JD, CFP, AARP, March 2009
As a fifteen-year-old sophomore, Sally was clearly the best member of the high school dance team. Tragically, both her proud parents were killed in an auto accident the summer before her junior year. Sally grieved with her younger brother, Billy, and the two went to live with their guardian, Aunt Marge.
Sally eventually found comfort in dancing, and began planning to make it her career. A teacher at school thought she had a good chance of being accepted at the prestigious Juilliard School in New York. Being in a position to offer a strong recommendation, the teacher called Aunt Marge to discuss the possibility. He told Marge to use $40,000 per year (including airfare, spending money, and so on) as a bottom-line cost figure in making her decision. It would take Sally four years to earn a Bachelor of Fine Arts degree.
Even though she was the children’s guardian, Marge explained, she had direct access to only a relatively small sum that had been left in the parents’ names. Sally’s father had been covered by a $250,000 life insurance policy at the time of his death, but it was payable to an irrevocable trust he had created. The trustee at this point was a bank that had changed names since the trust was written. Marge spent that afternoon on the phone, finding the appropriate trust officer.
She’d never seen the trust document, Marge explained to the young trust officer, but she had always assumed its funds were earmarked primarily for Sally’s and Billy’s college educations. Would the trust consider an arts school such as Juilliard a college, Marge asked the trust officer—and, if so, would the trust pay for Sally to attend it?
The officer told Marge that a three-person committee, acting as trustee, would make the decision after reviewing the terms of the trust. Though the officer was neither equipped nor eager to make decisions about a teenage girl’s future in dance, he and two other employees of an out-of-town bank would now have to do just that. Just as the child’s parents would have done, this institutional trustee had to determine whether Sally had the talent and long-term commitment to justify the cost. Would it become the break of a lifetime or an expensive diversion?
The trust committee knew the trust was being administered for two children, not just one. Whereas the document did not require equal spending for each child, and it seemed likely that the $250,000 trust principal, plus earnings, could easily cover the expense of four years at Juilliard, other questions had to be considered. There would not be enough to send Billy to an equally expensive college, should he apply there, or to graduate or professional school afterward if that became his goal. Was that fair? Meanwhile, if Sally proved ill-suited to a performing arts career, limited funds would remain to start her on a more traditional path.
Fortunately, the decision did not have to be made in the blind. The attorney who drafted the trust, having contemplated just this kind of dilemma, had specifically authorized the institutional trustee to rely on Marge’s input as an adviser on family decisions such as the one at hand. The trustee could therefore follow her suggestion without worrying about breaching its fiduciary duty. Marge felt certain that Sally’s parents would have encouraged their daughter to apply to Juilliard, so that’s what Sally did—and she was accepted. Everyone is satisfied that the decision was made by the family, as it should have been.
From “AARP Crash Course in Estate Planning: The Essential Guide to Wills, Trusts and Your Personal Legacy,” by Michael T. Palermo, JD, CFP, 2005, pp. 123-124.
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