Issue 22: 2012

The Next Gen Turns to Trusts

More, and younger, U.S. Trust clients are seeking the substantial benefits that trusts can provide for their children, spouses and other loved ones.

PHOTOGRAPH BY PETER TAYLOR

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Whether it’s because they find them confusing and intimidating, or they fear losing control of their wealth or for some other reason entirely, many people shy away from using trusts. At U.S. Trust, though, we have found that our clients generally appreciate how flexible and useful trusts can be, and take advantage of them in their estate plans. In fact, in recent years, an increasing number of our younger clients — in many cases the children of longtime clients, often dubbed the Next Gen — are creating estate plans and using trusts for themselves and their own families.

WHY IS IT HAPPENING?

Maybe it’s a generational thing. These young wealth creators, born after 1964 and sometimes referred to as generations X and Y, have not experienced the robust economic growth and favorable stock market conditions that their baby boomer parents enjoyed. As we learned in our 2012 U.S. Trust Insights on Wealth and Worth™ survey, their outlook and behavior are distinctly more cautious and practical. They are more proactive, action-oriented and multigenerational in their approach to wealth management. They are more inclined to hope for the best but prepare for the worst in terms of creating, protecting and passing on their wealth. And perhaps most important, they seek skills, knowledge and the professional relationships they need to attain their financial goals.

Perhaps, since we’re noticing this trend here at U.S. Trust, it has something to do with our Financial Empowerment program, which for the past several years has taught the children and grandchildren of our clients about the complexities and demands of responsibly handling significant wealth.

Whatever the reason, our younger clients — generally adults in their thirties and forties — are using trusts to prepare for the unexpected and to address a number of concerns:

TRUSTS ALLOW YOU TO GIVE PROPERTY TO THOSE YOU WANT TO BENEFIT, WHEN YOU WANT AND IN THE WAYS YOU DESIRE, WHILE ALSO PROTECTING IT FOR THEM.

To protect wealth and control its transfer. Many younger parents are using trusts to provide financial resources for children or to ensure that their spouses will be provided for if they die or become ill or are otherwise incapacitated. Despite popular perceptions to the contrary, trusts create more flexibility and control than giving property outright. Not only do trusts allow tax planning strategies unavailable with outright gifts, but they can provide greater control over the distribution of your wealth. In other words, trusts allow you to give property to those you want to benefit, when you want and in the ways you desire, while also protecting it for them — from potential creditors and others.

To create a charitable legacy. For most wealthy individuals, philanthropic goals are critical components of an overall wealth plan. Trusts can be designed to help ensure that your family’s philanthropic vision is translated into a strategy that has a meaningful impact. Trusts can help you fulfill commitments in a way consistent with your lifestyle; they may also reduce your tax exposure and, if desired, can involve your children and grandchildren, helping to ensure that they continue the habit of charitable giving as they grow older.

To maximize the use of estate and gift tax exemptions. The desire to reduce taxes is sometimes the overriding motivation for creating trusts, but even when other considerations take precedence, once these non-tax aspects are addressed, it’s still important to design a trust in the most tax-advantageous way possible that is also consistent with your goals. Trusts can be used to exclude some assets from your taxable estate. You can also obtain tax benefits during your lifetime by creating a trust that will fulfill your charitable objectives at your death but that provides you and other family members with income until that time.

To protect children’s inheritance from failed marriages, future creditors and the financial immaturity of beneficiaries. Many parents are concerned about their children’s readiness to handle substantial wealth responsibly. Some of our younger adult clients didn’t begin receiving distributions until their thirties, when they were much more fiscally knowledgeable than they had been earlier, and they are now using similar trust stipulations for their own children. Parents also worry about their wealth passing to a former daughter- or son-in-law after a divorce. While well-drafted prenuptial agreements can help prevent that, trusts can be structured to provide additional protection for divorced children and grandchildren. Trusts can also help beneficiaries who have disabilities, especially if they incur substantial healthcare costs, and can be used to help shield assets of people whose work puts them at higher risk of litigation — doctors or real estate professionals, for instance.

THINK OF CREATING TRUSTS AS PART OF AN INTEGRATED PLANNING PROCESS, AND THE EARLIER THAT PROCESS BEGINS, THE BETTER.

To provide ongoing financial management. If you decide you no longer want the burden of managing your financial assets, or if you suddenly become unable to manage them effectively yourself, perhaps as a result of an accident or illness, a trustee can assume the management and investment responsibilities, often with no significant disruptions.

WORKING WITH TRUSTS AND YOUR ADVISOR

The types of trusts and trust strategies are as varied as the people who create them, and while a single trust can be complicated, multiple trusts can be combined in ways that are even more complex. But rather than thinking about individual trusts, it’s more useful to think of creating trusts as part of an integrated planning process, and the earlier that process begins, the better.

No matter what your age, developing a plan for protecting and transferring wealth is less about choosing individual techniques than it is about a process of identifying and achieving objectives and building a relationship with your advisor. That process begins with in-depth conversations between you and your advisor. We need to understand your financial situation in detail, as well as your objectives, both for yourself and for family members and other beneficiaries. Then we can make suggestions in terms of specific techniques and structures that might be suited to you.

At the end of the day, there can be a lot of moving parts involved in creating and implementing an estate plan, but the process doesn’t have to be intimidating, and the benefits of incorporating trusts into your plan can be substantial.

IMPORTANT INFORMATION

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.

OTHER IMPORTANT INFORMATION

The U.S. Trust 2012 Insights on Wealth and Worth™ survey is based on a nationwide survey of 642 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 2012. Asset information was self-reported by the respondent. 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.