Nobody Likes a Trust Fund Kid: Here is How to Prepare Them
Trust fund kid: the term conjures up images of entitlement, snobbery, and pastel golf shirts. Daddy’s spoiled little brats account for only a little more than 1% of the U.S. population (there is that maligned 1% again). When compared to the approximately 22% of Americans who inherited money, those who did so from a trust fund are an especially small minority.
That does not mean the demographic should be ignored, especially in the current climate. Baby boomers—the country’s wealthiest generation—are expected to transfer $30 trillion to GenXers and Millennials over the coming decades, according to CNBC. That means millions of young people will, expectedly or unexpectedly, come into significant wealth.
Despite their negative connotation in the public consciousness, trusts are extremely useful estate planning tools for individuals looking to preserve and transfer assets. With a myriad of tax and non-tax benefits, trusts are not just a tool for the ultra-wealthy.
What is a trust and why is it useful?
While most Americans consider Wills the de facto estate planning tool, trusts have additional benefits that may work for many people. Deciding which is best for a client is a key step in the estate planning process. Let us get the basics out of the way:
Wills. A will is a legal document that directs the distribution of assets after death. Wills are subject to probate, or the court-supervised collection and distribution of assets.
Trusts. A trust becomes valid upon execution. You can place any number of assets into the trust, including cash, stocks, or real estate. In the case of an irrevocable trust, once you place the assets in the trust, you lose control of the assets, which then fall under the care of a trustee, such as a bank or attorney.
Trusts have many added advantages. When executed properly, most trusts will avoid estate and gift taxes, as well as probate. Trustors can also set stipulations for use of a trust, like restricting distributions to purchasing a home or financing education. Trusts can also help our clients:
Ensure a child’s inheritance is properly managed
Ensure homes are transferred to designated bene-ficiaries in the event of death
Keep a business in family hands throughout generations
Protect family assets in the case of future divorces
Maintain privacy of assets since trusts are not public records
Incentivizing achievement
Many parents, regardless of wealth, worry about spoiling their children. For those parents who have amassed great wealth, the concern often boils down to wanting to leave enough wealth so children can live productive, meaningful, and comfortable lives, but not so much wealth that the children choose to do nothing. In fact, even we parents without great wealth struggle with the same conundrum regarding our children. While trustors will want to give their beneficiaries every opportunity, trusts can be crafted in a way that incentivizes education, hard work, productivity, homeownership, or other desirable behavior.
Incentive trusts impose restrictions on distributions. For example, an incentive trust might require beneficiaries to graduate from college or even achieve a certain grade point average in order to receive money from the fund. They could require employment or charitable work, and reduce or cut off distributions for beneficiaries who fail to meet the requirements. Alternatively, they could deny distributions based on substance abuse, alcohol addiction, or other negative behaviors.
Incentive trusts have become increasingly common, but they are not without their drawbacks. A trust-maker may not foresee all future problems, including medical emergencies or financial hardships, which might affect the trust’s stipulations and require greater financial distributions. Designing these trusts effectively requires careful listening and understanding of the client’s situation so that the incentive trust will work to further the client’s goals.
Regardless of a client’s level of wealth, trusts are a useful tool for facilitating the control of assets. Trust designing and drafting not a quick process. Depending on the situation, we could spend numerous hours counseling our clients and building relationships to ensure the design of the appropriate client specific trust. Call us today at 301.892.2713 to begin the process of protecting your assets, your family, and your legacy.
Live with Your Bags Packed!