The role of a letter of intent in estate planning

Every will or trust contains language to help the executor of your will, or the trustee of your trust, make certain decisions about your assets after you pass. As time passes and situations change, additional clarity may be useful for the trustee or executor to carry out your wishes, especially if the document was drafted years ago. A letter of intent, also known as a side letter, can potentially help.

What is a letter of intent?

A letter of intent is a letter to the trustee of a trust, or executor of a will, that provides additional context and guidelines to help them make decisions. It is not intended to be legally binding.

Who should create a letter of intent?

Over their lifetimes, the circumstances of your beneficiaries will change. Children will grow up, choose or change career paths, start businesses, get married or even divorced. A letter of intent can offer you the opportunity to explain why specific language may exist in your will or trust.

For example, a letter of intent could offer insight into what types of distributions should be prioritized, such as health or education, or what sort of beliefs and legacy you hope to pass on to future generations. In the case of a trust, the letter can also provide guidance to the trustee for distribution requests.

"A side letter that is consistent with the trust itself has the potential to explain to the trustee the true purpose of the trust. It may offer examples of what the grantor considers desirable or undesirable distributions," says David Peterson, head of Advanced Wealth Solutions at Fidelity.

Some families find it hard to discuss their intentions with their heirs. In that case, you may prefer to provide a written explanation of the choices you made in your estate plan. If you have had open discussions, a letter of intent can also work to memorialize the conversation and provide a history for future individuals or generations unable to participate in the conversation.

Again, letters of intent are not intended to be legally binding. However, for example, if a letter is too long, or too detailed, it could potentially be deemed a codicil to a will or an amendment to a trust. If you choose to write a letter of intent, have your attorney review it to help avoid any unintended consequences.

Letter of intent guidelines

When writing a side letter, you may want to consider the following:

• The letter cannot conflict with or expand upon the terms of the trust. For example, if your trust includes language that allows distributions to be made for health or education, the letter of intent cannot encourage distributions for the purchase of a home or starting a business.
• Side letters should be used to supplement and add context to existing documents. They should not be used to avoid amending or restating existing documents.
• Getting professional help. As mentioned above, the letter of intent should be drafted or reviewed by an attorney to help ensure that there are no conflicts or inconsistencies between your letter and your will or trust document.

How to write a letter of intent

There is no one way to write a letter of intent. Whether one should be written, and what it should say, depends on your circumstances.

The following is a compilation of considerations when preparing a side letter. Not everything applies to every family, and you should not attempt to answer all the scenarios in your letter. Your attorney can help you determine what to cover in your letter and the best way to communicate those wishes.

1. Consider including stories of family heritage to display the values that should drive distributions.
2. You may want to explain your view on life and your own personal philosophy. Providing this information may provide additional perspective as the trustee decides whether to grant distribution requests.
   
   1. What role should the trust provide in shaping the beneficiary's life?
   2. Why did you set the trust up and what is your hope/intent for the assets?
3. Consider including details around the intended level of support for beneficiaries.
   
   1. Can or should the trust fully support one or more beneficiaries?
   2. Are there specific goals for beneficiaries, such as obtaining a higher education, having a job, and/or volunteering?
   3. If a beneficiary is a minor and is living with a guardian's family, when should the trustee make distributions, as permitted by the trust document, that directly or indirectly benefit the guardian's family? For example, should the trust pay for an addition to the guardian's family home or a larger car to accommodate the grantor's child?
   4. If a beneficiary moves in with a significant other, should the trust pay for all the expenses or only one-half of the expenses, such as utility bills, rent, and food?
4. Consider adding details around priorities and restrictions in the trust.
   
   1. Is the hope for the trust assets to be used for people who are alive now, or should the trustee's goal be to keep the trust in existence for as many generations as possible? If the grantor chooses longevity, the trustee may limit the amounts given to current beneficiaries.
   2. Are there restrictive/substance abuse provisions, and is there a reason that restrictions were included in the trust?
   3. If there are distribution restrictions if the beneficiary suffers from substance abuse, is it appropriate to pay for a professional intervention? What about inpatient care? Is there any limit to the number of times?
   4. Is there one person or group of people who should benefit from the trust funds the most (e.g., surviving spouse)?
   5. Is there one person or group of people who should be prioritized over any other beneficiary, even to the point of completely exhausting the trust assets?
5. Think about reasons beneficiaries are likely to request distributions, and consider explaining how you would like the trustee to consider these requests.
   
   1. Entrepreneurship
      
      • Should the trust primarily focus on the heir’s personal life rather than supporting their business endeavors?
      • Can the trust provide ongoing support for the business or should this be a one-time distribution?
      • Is a written business plan required?
      • What types of parameters should the trustee follow?
      • Should the trustee match funding that the business receives from professional investors?
   2. Real estate
      
      • Assuming that a residence is considered a prudent trust investment, should the trust own the house, or should the distribution be made so the beneficiary owns it?
      • Should trust funds be used for a down payment or to buy a home outright?
      • If an heir is married, should the spouse contribute to the real estate purchase?
      • If an heir already owns 1 or 2 other houses, should the trustee weigh any additional considerations?
      • Can distributions be used to purchase investment property?
      • What range or percentage of distribution of trust assets should be considered?
      • Should the beneficiary be expected to pay ongoing maintenance for the home purchased or should the trust pay these expenses?
      • How should housing expenses and liabilities be assigned and are these payments deductible by anyone? Expenses to consider include:
        
        • Real estate taxes
        • Mortgage payments
        • Homeowners/umbrella insurance
        • Home repair
        • Landscaping and/or pool maintenance
        • Other expenses to consider:
          
          • Furniture
          • New appliances
          • Renovations
          • Moving expenses
   3. Education
      
      • If the trust is for more than one beneficiary, how should the trustee balance varying education expenses between the beneficiaries?
      • Private vs. public universities? Trade schools?
      • Pre-college private school, including preschool?
      • Tuition only or are transportation, books, rent and other living expenses OK?
      • Graduate schools or internships?
      • Summer opportunities such as camp and/or travel experiences?
      • School trips?
   4. Luxury transportation
      
      • Should the trust pay for or maintain luxury cars, private planes, or yachts?
      • Does this apply to a beneficiary's spouse?
      • If a plane or yacht is purchased, should the trust be responsible for maintaining this property?
   5. Travel and vacations
      
      • What range or percentage of distribution of trust assets should be considered?
      • How often can a beneficiary request funds for travel (annually, semi-annually, etc.)?
      • Should the trustee consider how many people are going?
      • Can distributions cover expenses for non-family members?
   6. Gifts to charities and/or family members
      
      • Are large contributions to charities or family members a permissible use of trust funds?
      • Is it more important to make gifts than to preserve the principal for the use of the current or remainder beneficiaries?
   7. Special needs

   8. Note: Since special needs planning is a specialized area, consultation with an experienced attorney is especially important.

      • What types of distributions may be appropriate to make?
      • Is it more important to continue government benefits or to make the beneficiary as comfortable as possible?

While a single letter to both executors or trustees and beneficiaries may be appropriate, it may be helpful to write separate letters if there is different information you wish to share with each. If separate letters are written, it is important that they do not contradict one another.

Finally, although it may be implied that a letter of intent is confidential, do not assume that it may never be discoverable by the beneficiaries.

Next steps

When you create estate planning documents, you’ll need to think through the intent for your assets and underlying wishes for your beneficiaries. It is important to share these thoughts with your attorney so your documents are not drafted using vague terminology that is open to interpretation by executors or trustees. Should you choose to include a letter of intent, the original should remain in your attorney's office, but you should also consider keeping a copy of the letter in a safety deposit box for your heirs.