Inheritance Trusts: Wealth Consumption, Preservation, or Building?
At Borchers Trust Law we help our clients leave their assets to heirs in trust for the lifetime of the beneficiary. As we say, “Your heirs will receive a trust, not money.” We have called this trust the “Inheritance Trust™” since 2007.
Inheritance Trusts are primarily for protection of the inheritance – protection from the things that kill inheritances. We have dubbed these risks the “Killer D’s”:
- Destructive spending
- Divorce
- Debt collection
- Disability loss
- Addictions
- Disputes (among beneficiaries or lawsuits)
- Death taxes
The attack of any of these killers will mean a drastic reduction or loss of the inheritance.
Our ‘repellant’ for the Killer D’s is the Inheritance Trust, which safeguards the inheritance and offers the opportunity for independent trustees who will exercise discretion before making distributions into the wrong hands.
Protection for What?
There is more to an Inheritance Trust than protection from forces that conspire against beneficiaries:
Inheritance Trusts are also meant to provide positive guidance on the use of the funds, to help create a future of well-being. The trusts can promote certain long-held values or traditions, like paying for education or funding a vacation home, but the ongoing purpose may be for much more than the legacy of the past. Inheritance Trusts will also promote new purposes chosen by the next generation.
We spend precious little time talking about the positive and unique purposes for inherited wealth. Clients and advisors tend to think of the use of funds through our own lens. We imagine trusts are there to fulfill typical consumer goals, save taxes, or make even more money. Let’s go deeper than this, exploring the ways in which the Inheritance Trust will enable protection for positive purposes.
Three Positive Approaches to Inheritance Trusts
Inheritance Trusts are designed to promote the well-being of the beneficiaries. They will fall under three typical approaches:
- Protecting wealth so that it can be consumed on reasonable wants and needs.
- Preserving wealth so that it may be used for a lifetime of special purposes and “rainy days.”
- Building wealth for income now and to distribute to future generations and for philanthropy.
These approaches can also be thought of as employing your wealth for your offspring’s liberal consumption, moderate use, or conservative growth.
All approaches should be thought-out with the enhancement of the lives of the beneficiaries and their families in mind. This enhancement is what author and estate planning attorney Jay Hughes calls “flourishing.” For more, see the James E. Hughes, Jr. Foundation.
You cannot enhance lives by just giving money devoid of guidance and purpose, nor should you necessarily give the money to beneficiaries all exactly the same way, any more than you would have bought them all the same size clothes, put them in the same sports or activities, or sent them all to the same college.
Four Scenarios and Inheritance Trust Matchups
Each of your children’s relationship with money and the design of your plan should match up. How well do you know their relationship with money? Your knowledge will not be perfect, but see if any of these scenarios for Children A, B, C, or D ring true for your children. For each scenario, learn which type of Inheritance Trust is recommended:
Child ‘A’ can handle money pretty well. He/She/They know how to budget and live within their means. However, they probably could use help with paying off their mortgage, finishing paying for their own or their kids’ education, or taking a trip they’ve always wanted to take. ‘A’ doesn’t really need the inheritance as much as they could use it.
Because of their needs and wants, you feel they will probably spend it all but on good things for themselves. That said, the inheritance should be protected and earmarked so they can stretch it over a few years and not lose it to rash decisions or to the Killer D’s. If they are going to save money, then they will benefit from encouragement to invest and plan their spending wisely. At the same time, you are not concerned about ‘A’ quitting their job and just living off the inheritance. That would not be like them.
Best Match: An Inheritance Trust for liberal consumption
‘A’ has good money management skills and although they will likely spend it, they have very good prospects for the long-term.
Professional Support
‘A’ may be the best candidate for a child acting as their own trustee. An independent co-trustee can be selected if desired or needed in order to further protect the inheritance, and a financial advisor hired by ‘A’ is recommended.
Child ‘B’ loves to spend, and not necessarily on anything that will enhance his/her/their life for the long-term. Maybe saying that ‘B’ “loves” to spend is too strong; maybe they just can’t help themselves. But whatever the cause, they struggle. They go into debt. When they do try to get ahead, it is short-lived. You have helped them out with extra support here and there, even though they work. You could see them continuing to struggle.
If the funds are protected in order to be used over time it would be best. Left to their own devices, you feel the funds will be gone in a couple years or less with little to show for it. ‘B’ will need firm direction to steer them toward using the funds for rainy days. In the meantime, they need to stay self-supporting as much as possible. They might benefit from a small stipend, month to month, to level out their finances. If given a lump sum, you think it will be spent in no time. The Killer D’s would get them.
Best Match: Moderate, rainy-day trust
When the need for financial support arises from time to time, the trust management will pay off:
- Support while out of work
- Helping with grandkids’ college expenses
- Downpayment for a first home
- A high interest-rate mortgage they could pay down or pay off
Professional Support
Since fiscal management is not their forte, a moderate, rainy-day trust run by a trustee with good financial advice would be a good fit.
The trustee can say, “You’ve got to take a job, any job. You’ve got to live modestly so you can stay within your means. Otherwise, you’re going through the money too quickly.”
The financial advisor can say, “Based on your needs, the trust needs to stay invested for the future.” Or “Let’s take some of that inheritance each year and invest in an IRA or an annuity for your retirement.” An Inheritance Trust for moderate lifetime use is probably the way to go for ‘B’.
Child ‘C’ makes a great living and seems to be putting money aside. They don’t actually need money from you. This leads you to think beyond ‘C’ themselves and toward the future for your grandchildren and possibly some charities you’d like to help. You could make a difference there. But you need to make sure the funds make it that far.
You could just give ‘C’ the funds and let them figure it out, but that is risky. You are thinking about the Killer D’s and, even if life is on an even keel now, it has a way of being unpredictable. That said, it does not have to be all about the distant future. No doubt ‘C’ could do some wonderful things with funding from you as an added plus in their life, but you want to be sure the funds are well-invested. And, if their fortunes slip, the trust will be there to support them as well.
Best Match: Inheritance Trust for conservative growth
Remember ‘C’ does not need the inheritance, per se, but often “the taller and bigger they are, the harder they fall.” ‘C’ has more to lose if stung by a ‘Killer D’. But the hope is that the share for ‘C’ (and others like them) can build wealth for the future to fund great things for the family or the community.
Professional Support
An independent trustee will be required to keep the funds separate from ‘C’s own money and enforce proper investment and tax planning. An Inheritance Trust for conservative growth of the inherited wealth is a sensible choice for ‘C’.
Child ‘D’ will require help managing any inheritance. They are not capable of handling money, and every aspect of using and spending of the funds will need to be overseen, due to their unique circumstances. You are glad you will be able to put funds aside for them. But if there are public benefits that will pay, there is no need for your funds to be spent unnecessarily.
A trust could be used for good things for ‘D’ or else return to the rest of the family or be applied to charitable causes.
Best Match: Inheritance Trust for lifetime care
The child who has a special need not only requires an Inheritance Trust but one that will not cause them to lose public benefits, if applicable.
Professional Support
They will need a trustee, an independent person or trust company that will be objective and work with the child and their caretakers, as the case may be. This Inheritance Trust for lifetime care can serve as what is known as a Supplemental Needs Trust and is the only practical choice for ‘D’.
The Inheritance Trust Trustee and Advisors
Having a trust and a professional trustee and financial advisors will help Children A, B, C and D oversee the funds and investing to keep things going in the right direction. Child ‘A’ above may be the best candidate to act as their own trustee. An independent trustee can be sure the funds are used toward the Matchup destinations you have set for each child. Wealth advisors are there to provide the fuel for the journey. The children will select the primary, sensible uses within your parameters.
The Biggest Purchase you’ll ever Make.
Leaving an inheritance is, in effect, the biggest ‘purchase’ you will ever make. It will, after all, use all of your resources, all at once. You wouldn’t spend hundreds of thousands or millions without thinking hard about it. With a proper Matchup you are not making this expenditure lightly, but with deep consideration and forethought. The goal of the Inheritance Trust Matchup is to have confidence that you are doing the best you can to set up a successful inheritance.
By the way, you are not ‘ruling from the grave’ with an Inheritance Trust. The Trust is part of the future for your child, like the education you helped them to get. As with their education, it’s up to them how to apply it, not you. Your children should have the strongest say in how the funds they inherit are used, within broad parameters. In this way you are not ruling from the grave, as some fear they will do if setting up a trust.
Confidence in the Inheritance Plan
Can you say, “I have confidence that our hard-earned money will be put to good use, to enhance our children’s lives and do some greater good over time”?
We hope so.
Confidence starts with an Inheritance Trust Matchup suitable for today and a matchup you will review again and again. We will help you over the years to be able to have such confidence.
If you are a TrustSupport™ member, we’ll review the Inheritance Trust Matchup as part of your TrustSupport Review meeting. Not a member? We’d highly recommend that you see an attorney periodically to make sure your plan is kept up-to-date. A good first step would be to book a complimentary appointment with our Managing Paralegal, Courtney O’Riordan to discuss your estate plan.
