Estate planning often involves a balancing act: providing support to beneficiaries without enabling dependency, establishing firm rules while preserving flexibility, and expressing intent without sacrificing efficiency.
One tool that strikes this balance particularly well is the side letter. Though informal and typically not legally binding, a side letter accompanies a trust and provides the trustee with meaningful context into the grantor’s values, intentions, and distribution preferences.
What Is a Side Letter in Estate Planning?
A side letter is a document written by the grantor to the trustee, offering personal insight that supplements the formal trust. Sometimes referred to as letters of intent in estate planning, these documents might express the grantor’s vision for how funds should be used, share guidance on supporting beneficiaries through key life stages, or articulate broader family values.
Think of the trust as a screenplay. It outlines the storyline, characters, and structure. The side letter, then, is like a director’s notes. It provides behind-the-scenes guidance that explains the motivation and meaning behind the plot. It gives the trustee a fuller picture of the “why” behind the “what,” helping them make decisions that stay true to the grantor’s intent.
Why Specific Distribution Provisions Can Be Problematic
Weighing Trustor’s Control vs Trustee Flexibility.
It’s tempting for clients to want very specific provisions in their trust: “Don’t give my son any money unless he graduates college,” or “distribute money to my son for wedding expenses or if my son starts a business.” While these types of provisions can technically be “hard-coded” directly into the trust, doing so can often be problematic.
Rigid language can backfire. Life changes can result in scenarios where the grantor would regret the instruction. Importantly, because the trust’s provisions are legally binding, this language opens the door for a beneficiary to sue to demand a distribution, despite the trustee’s reservations. Maybe the son starts a business instead of finishing college. Maybe the son’s business is unsuccessful, and the trustee doesn’t want to pour more money into it so that the money can be deployed more wisely elsewhere. A trust that’s too rigid may force a trustee into an outcome the grantor never intended, limiting trust distribution flexibility that could otherwise support evolving family needs.
Preserving Tax and Asset Protection Features.
Vesting discretion in the trustee to make distributions isn’t only beneficial for reacting to changing circumstances. It’s also critical for asset protection in drafting distributions and maintaining important tax advantages. Many asset protection and tax protection strategies require trusts to be fully discretionary, and forced distributions of trust property to beneficiaries negate those objectives. These objectives should be important to all families, not just high-net-worth families.
To ensure that a trust you set up for your beneficiary is hard to reach by that beneficiary’s creditors (including former spouses), the state law that governs the trust will require that the beneficiary have no discretion to access the trust property. One of the ways to demonstrate that the beneficiary has no access to the trust is to vest distribution decisions fully in the trustee (and appoint a trustee who is not the beneficiary). If your trust requires the trustee to distribute a certain amount to the beneficiary at the beneficiary’s request, you may be defeating the spendthrift nature of that trust.
Many wealth transfer strategies that are driven, in part, by the desire to minimize estate and generation-skipping transfer taxes require that the trustee have full discretion to distribute income and principal of the trust. This is primarily a concern for high net worth families.
The main objective is to have assets grow and accumulate any income inside the trust so that the taxable estates of the beneficiaries remain under the taxable exemption amount. The trust assets become taxable only if distributed to the beneficiary for consumption (and not to reinvest or control outside of the trust and inside the beneficiary’s taxable estate). A trust that requires the distribution of assets to the beneficiary under circumstances dictated by the trust creator may be causing more assets to be included in the taxable estate of the beneficiary than is necessary. For example, it may seem like a good idea to force a distribution of cash to the beneficiary so that he can purchase his first home. But the trust could just as well purchase the home and let the beneficiary live in the home. This way, the beneficiary can earn and accumulate his own assets (e.g., by working) without worrying that the home purchased through his parents’ assets also adds to the future estate tax burden for his own estate. This approach not only maintains protection benefits but also supports efficient tax planning in drafting distributions, ensuring that trust assets are deployed in a way that minimizes unnecessary estate tax exposure.
Increasing Drafting Cost.
Rigid distribution guidelines increase complexity and cost. The more unique provisions a trust has, the more time (and billable hours) are required to draft, review, and ultimately administer the trust.
How Side Letters Support Trustees in Estate Administration
Trustees often shoulder the burden of making difficult distribution decisions. Should they say yes to a request? Does this align with the grantor’s wishes? Would they have approved of this use?
A side letter offers helpful insight. It may share values the grantor held dear (like financial independence, philanthropy, or education) or describe how the grantor hopes the trust will help future generations. It can include specific examples, personal reflections, or reminders to be philanthropic.
Although it’s not necessarily legally binding, a well-crafted side letter can:
- Reduce ambiguity in how a trustee should use discretion
- Minimize family conflict by providing clarity of intent
- Help the trustee make difficult decisions with greater confidence
Why Side Letters Offer Flexible, Cost-Effective Estate Planning
Incorporating a side letter allows the trust document to remain clean, flexible, and broadly discretionary. That makes it easier to use standardized trust drafting platforms or software, reducing cost and complexity. Meanwhile, the grantor’s personal vision lives in a parallel, more narrative format.
In short, where estate plans may provide flexible language, side letters allow for a place for nuance, emotion, and intent (without locking a trustee into a given course of action).
Final Thoughts: The Value of Side Letters in Estate Planning
When used appropriately, side letters can be a powerful complement to a well-drafted trust. They support trust distribution flexibility, asset protection, and long-term efficiency and help a trustee to administer a trust in line with the grantor’s intent, without sacrificing flexibility or increasing complexity.
Wealth.com’s forms are specifically drafted to address these concerns, emphasizing trustee flexibility, asset protection and tax planning. This is why we prefer for our forms to be paired with a side letter, rather than drafting bespoke distribution language directly into the trust document.
In estate planning, it’s not always about having the most rigid guardrails. Sometimes, the best guidance is a well-lit path.
