Managing the Inheritance of Future Generations

Tab 1

August 28, 2015


You cannot be both young and wise, Stephen Colbert once said — a thought that will rub some the wrong way but that certainly is on the minds of many when setting up trusts for their descendants.

 

The effect of wealth on the human psyche can be profound, but sometimes in negative ways, particularly for young people just starting to build an identity, says Israel Roberts, a trust officer for The Private Client Reserve of U.S. Bank.

 

“Self-worth is very different from net worth,” Roberts says. “Net worth that is predominantly generated by an individual takes on a very different meaning than inherited wealth.”

 

There are exceptions, but most individuals who earn their wealth have an understanding of the journey endured to arrive at the current balance sheet, while those with inherited wealth can view the money in different ways.

 

Few young people (those under 25) with inherited wealth truly understand the journey that led to their good fortune,” he explains.

 

If set up properly, a trust, which must be drafted by an attorney, allows the grantor, the original owner of wealth, to define distribution and use of the trust funds long after he or she is gone.

Tab 2

August 28, 2015


What follows are ways to create a trust to influence the behavior and self-worth of the trust beneficiaries.

 

1. Meritocracy

At each stage in life, the grantor incentivizes certain behavior for his or her descendants, such as basing trust distributions on school performance or success. This can be a powerful tool for helping to establish certain productive traits early in adult life.

 

“For example, John, 20, is attending college. If he achieves a 3.0 grade point average, he receives a certain amount of money from the trust for living expenses,” Roberts says. “If that GPA is not achieved, a lesser amount is distributed.”

 

2. Skin in the Game

This is a motivational tool similar to the idea of employers matching contributions to employee

 

benefit plans to spur a boost in savings. “The trust could state that the grantor’s grandchild will receive a principal distribution up to 50 percent of the beneficiary’s adjusted gross income for the previous year to be distributed in quarterly installments,” Roberts explains. “This encourages the beneficiary to earn a living.”

 

3. The Trust as an Educational Tool

Following the “skin in the game” idea, a trust can be used as a priceless source of education to beneficiaries. The grantor can attribute a matching contribution to a beneficiary’s retirement account or college savings plan.

 

4. A Philanthropic Journey

The grantor can include language that incentivizes philanthropy. “The grantor can make gift-giving a prerequisite for any future distributions or make board participation a necessity,” Roberts says.

 

 

Tab 3

August 28, 2015


5. Family Reunions

To encourage family bonds, a trust can be granted the power to distribute funds for a family reunion every few years to help solidify the extended family unit.

 

6. Vice Clauses

To discourage certain behavior, one might state in the trust document that no distributions will be made if the beneficiary is taking illegal drugs or has been convicted of a felony in the last 12 months.

 

7. Age-Related Distributions

Age-based distribution provisions are fairly common in trusts, stating, for example, that a beneficiary should receive one-third of the trust at 25, one-half at 30 and the rest at 35. “It might make sense to have principal discretionary provisions available to the beneficiary during younger years for certain purposes, but distributions of large sums of money may result in a more advantageous outcome when reserved for a more mature, established adult,” Roberts says.

 

 

8. Life Milestone Distributions

grantor ties distributions to achievements or life stages: graduating from college, buying one’s first home, getting married, having children. However, Roberts cautions: “One would not want a beneficiary to get married or have a child solely because they would receive $100,000, which is why this type of strategy makes more sense if the document is drafted to reserve the right of the trustee or other fiduciary, in their discretion, to overrule the obligation to distribute trust funds to a beneficiary for a particular achievement or life stage.”

 

9. Communicate Your Wishes

“These ideas help a grantor think about how they might achieve a desired effect when drafting a trust document,” Roberts says. “It’s particularly important that a grantor communicate their wishes clearly to the estate planning attorney and the future trustee(s). Because this strategy can put additional pressures on a future trustee in executing the grantor’s plan, it is important that as much information is communicated as possible to avoid any confusion.”

 

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