Why having a trust plan is essential for all investors

Over the next 40 years, it’s projected that more than $41 trillion will be inherited by the children of baby boomer parents, the single largest intergenerational wealth transfer in human history. Yet few of us have done much in the way of meaningful planning beyond the preparation of a will. And fewer still have established any trusts to help facilitate the transfer of our wealth.

Traditionally, trusts were established as a means to protect minor children and ensure that someone would responsibly oversee their inherited assets if the parents died. Ask many people about their purpose, however, and they’ll likely paint the picture of a financial tool specifically designed to protect the spoiled offspring of multi-millionaires from their own excessive indulgence.

The truth is that almost everyone can benefit from trust planning. Regardless of how wealthy you are or how fiscally responsible your heirs, trusts can make sense — not because you need to protect your kids from themselves, but because you want to protect them from outside threats. Trusts that have no end date can help safeguard family wealth from divorce, potential litigants and future creditors.

HARSH REALITIES

With marriage dissolution rates near all-time highs, divorce is perhaps the single greatest threat to multi-generational wealth. Keep in mind that any comingled assets automatically become joint marital property. Yet few are understandably eager to begin a hopeful journey with the harsh reality of a prenuptial agreement.

Even adult children in healthy, stable marriages can face a great deal of tension when inheriting a considerable sum of money. Advisers may counsel him/her not to do anything to put their spouse’s name on those assets. Wouldn’t you prefer not to put your child in that uncomfortable position?

If your child’s future inheritance is in trust, it becomes a very simple conversation. “The assets are in trust because my parents wanted to make sure that if I ever got sued or ran into financial difficulties, the money would be protected from creditors. I get steady income from the trust, so let’s go ahead and buy that vacation house we want, or use the money to help put our kids through school.” Both spouses are able to benefit, but the trust assets are never comingled or become marital property.

OPEN DIALOGUE

Most people are far too private about their estate plan. Nobody knows who’s getting what and why until the reading of the will. And while that may heighten drama in movie, book and television plots, it’s not so entertaining in real life. The more you conceal, the greater the likelihood of friction, tension, conflicts, anger and disappointment.

Generational wealth transfer doesn’t have to be complex, but it does require open and continuous communication between all people involved. If you don’t explain the underlying reasons for your trust decisions and the protections they afford, your adult children will naturally wonder, “Did mom and dad not trust us? Did they think we were irresponsible? Didn’t they have any faith in us?” The only way to ensure they have a clear understanding of the purpose and intent of your actions is through an open and honest dialogue.

And while you may be reluctant for them to know the intimate details of your finances, remember that their inheritance will likely have a profound impact on their own plans. Realizing that certain assets are guaranteed to transition in the future can help them make important life decisions today — such as one parent staying home to raise children, knowing that they don’t have to worry about the impact on their retirement savings.

If you have complex family dynamics, make sure you select an unbiased trustee who can remain completely objective. Whether or not that’s someone more intimate to the family will depend on the individuals involved. It’s up to you. But by all means, talk through all the trust planning decisions you’re making and why. Even though the conversation may feel a bit awkward, it will be far less awkward than the conversations that will occur after you’re gone, if nobody knows your reasons.

Tom Mingone is founder and managing partner of Capital Management Group of New York.