Clients of U.S. Trust have always relied on trusts — to facilitate, protect and control the transfer of their wealth, to create a charitable legacy, to maximize the use of gift and estate tax exemptions, and even to protect children’s inheritances from failed marriages or future creditors. Ongoing demographic and other changes, however, have made some conventional assumptions and planning approaches — not to mention some existing trusts — outdated. Let’s look closer at some of the changes.
Different generations, different needs. Children may have different attitudes than their parents about wealth, gender roles, marriage and divorce, careers, retirement and inheritance. The planning assumptions and approaches that worked for parents may not be useful for their children.
Marrying later, living longer. The average ages for first marriages and childbirth are increasing. Even so, with longer life expectancies, children may be older when they inherit wealth than has typically been the case in the past. Since trust documents often trigger distributions on the occurrence of an event (typically the death of a patriarch or matriarch), children may receive the distribution all at once or later than they — or their parents — would consider ideal.
Prevention and Treatment of “Affluenza”
What is the best age to create a checking account for your child? When should your children learn that they are going to inherit money?
U.S. Trust has developed educational seminars and programs geared to educating children about wealth and wealth management, helping them to make informed financial decisions and become more responsible stewards of their families’ wealth.
More divorces, more remarriages. Married couples divorce and remarry more frequently than previous generations. Children of blended families are growing in number. The “new” family can be complicated, and past approaches to planning may no longer suffice.
Ever-changing gender roles. Women have become a powerful economic force, earning more money and controlling more of the nation’s wealth than ever before. They are also more likely than their male counterparts to be primary caregivers for parents and children, to face significant retirement income gaps and, if married, to outlive their spouses. As a result, their attitudes and approaches toward managing family wealth can often differ from those of men — particularly in areas like philanthropy.
It’s getting mighty crowded. More generations are simultaneously alive than ever before. This may mean that more beneficiaries will share an inheritance at any given time, so finding ways of minimizing the potential for conflict among multiple generations is becoming increasingly important. This is particularly true when it comes to family vacation homes. It may also be important to address the impact that so many simultaneous distributions can have on the sustainability of trust principal.
Planning issues for 21st-century families
“In the United States, we set days aside where we honor and celebrate mothers and fathers. At U.S. Trust, we are thinking of them — and of the whole family — throughout the year,” says Chris Heilmann, chief fiduciary executive at U.S. Trust. “We are thinking about how we can help our clients and their families plan for the many possibilities that they may encounter and help develop appropriate planning strategies that address our clients’ unique situations.” “Trusts need to reflect your specific situation and needs,” adds Steven Lavner, a member of the National Wealth Planning Strategies group at U.S. Trust. “But most important, they need to be anticipatory and flexible because, more than ever, family situations can — and often do — change. New trusts can be designed with that flexibility. If you already have a trust that’s out of date, that flexibility can often be retrofitted with the aid of experts.”
When establishing a trust today , what should you consider?
Transferring wealth to spouses. In the past, to get a full marital deduction (that is, deferral of estate tax until the death of the surviving spouse), assets had to be left outright to the surviving spouse or in certain types of qualifying trusts. To retain more control of assets, particularly in the case of second marriages after a death (where the goal is often to benefit the surviving spouse, while also protecting the interests of children), estate planners often employ a qualified terminable interest property (QTIP) trust. With a QTIP, to receive a full marital deduction, the trust need only grant the surviving spouse the right to receive income every year. “But now we’ve come full circle,” says Drossman. “While this special type of planning may still be appropriate with second marriages and children of multiple marriages, in the case of long-term marriages where both spouses have been involved in managing the family’s finances, limiting the surviving spouse’s control of trust assets may not be desirable or appropriate.”
Offspring and descendants. Evolving family structures and new reproductive technologies are redefining what it means to be someone’s child and someone’s parent in society and under the law. Recognizing a child’s status is especially important when it comes to distributions. In the past, biological and adopted children were recognized in traditional will provisions, but stepchildren were not. Today, with the prevalence of divorce and remarriage, the number of stepchildren is on the rise, and the number of adoptions is falling. “And what about the impact of new or future reproductive technologies involving surrogacy, sperm or egg donation, genetic mapping and cloning?” Drossman asks. “Helpful changes in the law try to account for some of these parent-child relationships within the areas of reproductive technology and adoption.” Still, Drossman cautions, when you are creating trusts, it is important to establish clear definitions for words like “parent,” “child,” “descendant,” “heir” and “issue,” and to clearly address them in wills and trust documents.
Sharing wealth among children. Parents often distribute assets equally among children, but it can make sense to consider alternatives. In many cases, equal treatment wins out, Lavner notes, but in others, a variation may be more appropriate — for instance, in the case of succession planning with a family business and multiple children, or a situation in which a child has special needs and may require a form of specialized trust. A challenge is that treating children unequally could create conflict and damage relationships among family members. But it doesn’t have to be an either-or situation. A sprinkling trust, for instance, gives the trustee authority to make distributions to some or all beneficiaries in equal or unequal shares. This approach fits more closely with the “equitable,” rather than the “equal,” approach. “It’s an effective way of gathering your assets together into one ‘pot’ and then leaving specific decisions to the trustee as to who gets what,” Drossman says. It is possible to have separate trusts for some assets and a sprinkling trust for other assets, he adds. The separate trust can provide each beneficiary with an equal share, and thus avoid rancor and rivalry. But you can use the sprinkling trust for whatever needs-based decisions might arise.
Many parents question the wisdom of giving large amounts of wealth to someone in his or her twenties, or even thirties.
Incentive trusts. Trust-fund babies. Silver-spoon kids. We’ve all heard the terms. More than ever, wealthy parents are worried about the potential ill effects of wealth on their children. They worry that by leaving them too much, they’ll remove all incentives for their children to become productive members of society. Incentive trusts contain provisions that stipulate that certain conditions be met before distributions can be made — perhaps requiring the beneficiary to attend a certain school or be engaged in a certain type of employment. “Sometimes these ‘incentives’ can be effective, but when requirements become too subjective or complicated, the likelihood increases that the trust will not achieve its goals,” says Drossman. This holds true for both difficult-to-measure incentives, like requiring a “productive lifestyle,” as well as more complicated and intrusive requirements like passing drug tests. And, even worse, such requirements can invite lawsuits. Appointing knowledgeable and experienced trustees, and imbuing them with broad discretion rather than tying their hands with difficult-to-interpret restrictions, may prove best in the end.
How and when to distribute assets to beneficiaries. According to U.S. Trust’s 2013 Insights on Wealth and Worth® survey, many parents question the wisdom of giving large amounts of wealth to someone in his or her twenties, or even thirties, and, regardless of age, of giving it all at once. Drossman notes that one possible alternative is to divide the inheritance into thirds — but with one-third at the time of the grantor’s death, another third five years later and the final third 10 years later, with no large distributions allowable before a certain age — say, 45. Of course, these numbers can and should be adjusted to fit your particular situation. You may also want to factor today’s large estate tax exemption into your thinking; it may be preferable from a tax standpoint to move assets into a child’s estate sooner rather than later.
Distributions to beneficiaries don’t have to be set in stone. Discretionary rather than mandatory distributions of trust assets to beneficiaries can make sense for many reasons, including the beneficiary’s maturity and needs. “Of course,” says Lavner, “trustees who will carefully and thoughtfully assess discretionary distribution requests are crucial.”
Powers of appointment. In Lavner’s view, conferring a power of appointment — that is, allowing your beneficiaries to have a say in what happens to trust property — might make sense when you want to keep money within your family but you aren’t sure who would be the best recipients. This way, you pass the power on to the beneficiary to decide. This not only allows for redistribution but also allows a new person to consider new circumstances — for example, special needs, how children have matured (or not) since the document was drafted, etc. You can grant broad control to beneficiaries — known as general powers of appointment — so that beneficiaries can give trust property to anyone, including themselves. You can also grant limited powers of appointment, which can restrict the beneficiaries’ ability to redistribute, allowing gifts only to certain people — often family members. And powers of appointment can be made to be exercisable during the beneficiary’s life or at death, or both. The tax considerations of conferring any type of power of appointment will need to be taken into account.
More generations are simultaneously alive than ever before.
Trust length. The duration of today’s trusts is in general much longer than in the past, due largely to a desire to insulate assets from taxation and the trend to repeal the Rule Against Perpetuities in many jurisdictions. But beyond tax advantages, does it really make sense to set up a trust for more than 100 years? How different will society be? Will the trust provisions prove flexible enough to still achieve your goals? “Perhaps,” says Lavner, “but you should probably consider whether you really want a trust to last that long and, if you do, have the trust be flexible enough to keep up with changing times.”
Asset protection. Long-term trusts also allow the protection of assets from trust beneficiaries’ creditors. Parents may be concerned about their money going to a daughter- or son-in-law in the event of a divorce. While a carefully worded prenuptial agreement can help, you might also create a trust to further protect assets from judgment claims. According to Lavner, trusts may avoid unintended consequences if the assets were left directly to a surviving son or daughter. Similar thinking occurs with regard to beneficiaries with disabilities, especially those who incur substantial healthcare costs, or beneficiaries whose professions have a higher risk of litigation. A trust may provide certain levels of protection in these situations.
The Agent for Trustee Option
If you’ve been named a trustee, you may have the option to appoint co-trustees to serve alongside you and help provide the required technical and investment expertise.
However, if you’d prefer to retain full control, you may be able to select an “agent” to provide expertise, support and guidance to help you make the complex and often difficult decisions — such as investments, balancing diverse and conflicting interests, distributions, tax filings — that trustees face.
The agent can also assist the trustee with his or her administrative duties to help alleviate that burden as well.
Alterations of an existing trust. One of the newer ways of modifying a trust is a process called decanting, in which an existing trust is taken and — through various procedures and in states that allow it — essentially poured into a new trust with new provisions. In cases where it appears that the spirit of the trust is not being honored because of out-of-date provisions, drafting errors, or ambiguous terms, or perhaps when special-needs provisions are needed, opting to decant could be a possible solution. Depending upon the jurisdiction, other options to alter an irrevocable trust may be available.
Given trends toward more idiosyncratic and longer-duration trusts with complicated distribution provisions, the job of the trustee has become increasingly complex and time-consuming — not to mention critical to ensuring a trust’s success. Ultimately, your choice of trustee is a personal one, but it can be helpful to weigh the potential advantages and disadvantages of the many available options.
While family members, friends or business owners have the potential to be empathetic, personally involved trustees, it’s important to consider whether they have the necessary time and expertise to be effective fiduciaries, or whether personal involvement could lead to unintentional biases or even strained relationships between the trustee and beneficiaries.
When choosing investment advisors, corporate trustees and attorneys, the considerations are reversed. While it may be possible to find trustees with the requisite expertise in both investments and fiduciary laws and principles, it’s important to consider whether they might be too dispassionate and lacking understanding of family dynamics.
The trust’s assets — particularly if they happen to be specialty assets, like a private business or real property — can also be a factor in trustee selection. Does the trustee have the experience and expertise to handle these sorts of assets?
In the end, your choice comes down to your priorities and preferences. It doesn’t have to be an either-or decision, though, as co-trustee arrangements among the various alternatives are always possible and indeed are very common.
New Realities, but the Fundamental Principles Haven’t Changed
Keeping abreast of broad demographic and other changes is instructive and important, but in the end, effective wealth management for families is less about statistical averages than it is about individual families. “Here at U.S. Trust, we have a long history of managing wealth for families through changing environments and over multiple generations,” says Heilmann. “We have always understood that all families are unique and complex, and one-sizefits- all approaches to wealth management are never appropriate. Given the increasing complexity of family structures, that’s especially true today.”
When it comes to trusts, Drossman adds, the planning should be customized, comprehensive and flexible. Your trust needs to address your family’s specific needs, and often across multiple generations, and it must also be flexible. “Being too restrictive, locking things up too tightly — even with the best of intentions — can be a recipe for disaster,” he says. “A trust that can’t adapt to inevitable change is not likely to fulfill your intent, either in the short or long term.”
Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.
The 2013 U.S. Trust Insights on Wealth and Worth® survey is based on a nationwide survey of 711 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. Among respondents, 37% have between $3 million and $5 million in investable assets, 31% have between $5 million and $10 million and 32% have $10 million or more. The survey was conducted online by the independent research firm Phoenix Marketing International in March 2013. Asset information was self-reported by the respondents. Verification for respondent qualification occurred at the panel company, using algorithms in place to ensure consistency of information provided, and was confirmed with questions from the survey itself. All data have been tested for statistical significance at the 95% confidence level.