OK, “take over the world” may be a bit much. However, trusts are a very popular vehicle used more and more in estate planning for business families and legacy wealth families. And the downsides are often not discussed.
On the benefits side of the equation when transferring assets through trusts are reducing estate and gift tax liabilities, creditor/lawsuit protection (future divorce is often cited), and determining when heirs get their inheritance, how much they get and for what purposes it can be used.
In my work, I often come across situations in which the grantor of the trust expressed his or her wishes to their attorney with little or no communication to the beneficiaries or the trustees. The attorney writes up the rules about how the trust will work, who the trustees will be and how and when the beneficiaries get access to the assets. This is all important stuff and attorneys are a key part of the process, but even together they are not sufficient to overcome a lack of communication within families. Problems can result, sometimes many years down the road.
One of the powerful missed opportunities is that grantors often do not take the time to sit with beneficiaries and directly express what they are trying to accomplish. These are gifts made out of love and with a deep sense of purpose, based on a desire to leave a meaningful legacy that will support a full and healthy life for the beneficiary. When dialogue is missing, the trust can become an impersonal, often confusing gift. And this lack of communication can set trustees and beneficiaries up for conflict.
Sometimes children or grandchildren are appointed as trustees for their own siblings or other relatives, leaving the trustee in a tricky spot when the beneficiary makes a request and the trustee feels it is not in keeping with the trust rules. It isn’t hard to imagine the kind of tensions that can arise in this situation.
Other times professionals are hired to perform the trustee function, putting beneficiaries in a deeply personal and significant relationship with someone they do not know until they inherit. And even after inheriting, the trustee-beneficiary relationship often is much less than the mentoring relationship it is coming to be in current, progressive settings.
Another scenario is when operating business assets are placed into trust for siblings or cousins long before it is clear they can productively own and manage together. There may be tax advantages but I’ve seen families torn apart as it becomes clear the sibling or cousin team is not prepared for the responsibility they were given many years before.
These are only a few of the many problematic scenarios that can play out around trusts. Fortunately, there are more enlightened approaches being taken. Attorneys are working more frequently with family dynamics/governance experts early on in the process to help grantors better express what they are trying to achieve: the love and wishes and all the expectations for trustees and beneficiaries alike.
Some attorneys are furthering their training to better serve families. My colleague John Warnick is a trust and estate attorney and leader in bringing significant intention to the trust development process. He founded the Purposeful Planning Institute where he offers the Purposeful Trusts & Gifts Mastery Program which is designed for estate planning attorneys.
There are definitely benefits to using trusts as part of the wealth transfer process. And I cannot overstate the value and importance of communication, education and a process of family dialogue to set expectations for all involved. It makes a tremendous difference in the lives of inheritors.
What is the Lesson?
Enterprising Families: I’ve said it before but the basics are worth repeating as they can make all the difference in trying to ensure that wealth serves family in healthy and productive ways. Open communication, intentional and deliberate development of the rising generation and passing on wisdom and values should be as much a part of the trust process and documents as any other aspect of wealth transfer.
Advisors to Enterprising Families: When working with families who have accumulated significant wealth, do not let tax savings, creditor protection and other technical dimensions blind you and your family clients to the essential love behind the gift. You are in a key position to remind them of this, keep it front and center and integrate it into the process.