In our work with family stewards, we are often asked to provide financial guidance for parents or grandparents who have set up trust funds for children or grandchildren. Motivated by a deep desire to see that the next generation is provided for, these clients typically spend significant time and energy developing investment strategies that offer the maximum potential for securing the financial future of the beneficiaries of the trust.
But equally important is the care with which the trust is designed. The best investments and the most cooperative markets in the world won’t guarantee the success of a trust that isn’t properly designed and maintained according to your wishes and intentions. It’s important to spend time with an experienced estate planner who listens carefully to your questions and concerns. A trust is not a “one-size-fits-all” document, and the particulars of your situation — and that of your beneficiaries — really do matter.
One common misconception involving trusts is that they are only for the super-wealthy. In fact, anyone who carries a sizeable amount of life insurance, especially if children or grandchildren are beneficiaries, could possibly benefit from using a trust to own the policy and administer the proceeds payable upon death. The death benefit is excluded from the value of your estate and passes directly to the trust, becoming payable according to the terms you stipulate in the trust.
Another mistake that many people make in setting up trusts for their children is not thinking through their choice of trustee. In some cases, it can even make sense to appoint co-trustees, as this affords a built-in system of checks and balances in the management of the trust. Sometimes an institutional trustee may be the best choice, provided the relationship involves a sufficient understanding of family dynamics. Many people appoint a trusted family member or friend, which can work well. The risk here, though, is whether the individual has the appropriate level of knowledge, expertise, and dispassionate judgment to administer the trust in a timely and equitable manner.
You also need to be clear about the goals for the trust. Is it intended to give the beneficiaries a financial head start, or do you want to provide an income stream for life? At what age do you want the beneficiaries to receive the proceeds? Are there duties or qualifications you want the beneficiaries to demonstrate — achieving a certain amount of income on their own, for example — before receiving the assets? Are there certain life events — marriage, buying a home, starting a business — for which you want to specify a benefit from the trust? You can design a trust in a wide variety of ways, but you need to know what you’re trying to accomplish.
Finally, and probably most important, don’t make the all-too-common mistake of failing to communicate with the beneficiaries about the trust, your intentions for its use, and any conditions attached to receiving its benefits. Certainly, no one enjoys a conversation predicated on their own demise, but talking things through with your heirs should help them understand the depth of your regard for them and your concern for their future well-being. The more they know and understand, the better the chance that your estate planning will achieve the goals you have set.
Stay Diversified, Stay YOUR Course!
