It can be hard to foresee all the changes life throws at us over the years. It can be especially difficult to anticipate how those changes might impact wealth for generations to come.
Here is one example. A couple gets married and combines their assets into a single estate totaling about $6 million. Both parties have been married previously. The husband has one child from his first marriage, and the wife has two. Upon getting married, they update their wills to reflect their wishes – the surviving spouse will inherit the other’s assets, and at the passing of the second spouse, all remaining money will pass outright to their three children equally. Each spouse feels confident about the planned transfer of their assets and the equal treatment of their heirs.
Unfortunately, this arrangement fails to take into account changing dynamics that can occur over the years. For example, if one spouse passes and the surviving spouse has a falling out with their stepchildren, there is nothing keeping the surviving spouse from changing their will’s details or distribution plan to shortchange the stepchildren. Instead of each receiving $2 million, one child could receive all $6 million, while the other two children inherit nothing.
In another scenario, if one of the children runs into financial or legal troubles as an adult, their inheritance will likely be fair game for creditors or legal challengers. In either case, the couple’s heirs are not guaranteed the long-term stability assumed to be provided by their parents’ wealth.
That is why many high-net-worth individuals take an additional step to future-proof their estate and keep their wealth in the family: they set up a trust.
Trusts are designed to provide individuals control of their wealth, even after their passing. A third party – the trustee – typically holds an individual’s assets on behalf of their beneficiaries and manages them according to the specific terms outlined in the trust documents, which can include when and to whom distributions are made. This can be particularly valuable when passing assets to heirs who would presumably benefit from a long-term, structured inheritance.
Some types of irrevocable trusts can reduce tax liability by removing assets from a taxable estate. In addition, many trusts keep assets out of probate. This makes trusts an attractive option for many families.
Keeping wealth in the family
For individuals and families who want to stay ahead of life’s uncertainties and guarantee their children and their descendants will be benefactors, a bloodline trust is one effective option. The asset protection vehicle ensures any inherited assets will stay in the family’s bloodline. Bloodline trusts are especially valuable in protecting a family’s assets from the Three D’s that can derail estate planning:
- Death – The trust can ensure assets will be passed on to a direct descendent, rather than a step-child or other inheritor who isn’t related. It can also shield the assets from death taxes.
- Default – The trust can protect family assets from creditors and potential bankruptcy proceedings should inheritors find themselves with financial difficulties as adults.
- Divorce – The trust can prepare for unplanned events in future generations, including stipulations that in the event of a child’s divorce, assets will stay within the family and separate from divorce proceedings.
Managing your heirs’ expectations
While trusts can provide peace of mind for the head of the household, the idea of a structured inheritance is not always well-received among family members who may be expecting an outright lump sum or among direct family members and their spouses who may be planning to use an eventual inheritance in their own retirement planning. For this reason, many individuals hesitate to put this strain on the family’s relationships.
At Wescott, alleviating this emotional burden is part of our job. Wescott Trust Services acts as the trustee or co-trustee for many of our clients. We play the role of the objective third-party in administering trusts in accordance with their written provisions and the intent of the grantor. This eases the strain on family members by separating inheritors’ expectations and deceased family members’ wishes from the family dynamics.
The decision to use a trust should always be made within the context of your overall estate planning goals. By working with a knowledgeable advisor, you can determine how to structure a financial legacy that makes sense for your family.
To learn more about trusts, reach out to our team.