Most would conclude that the children of wealthy families have a myriad of advantages. These include financial security, freedom from debt and an array of possibilities made available by the bounty of their inheritances.
Yet these gifts are often accompanied by invisible constraints built into the legal structures that hold their wealth. By locking people into relationships and assets over which they have no authority, trust fund guardrails designed to protect and provide can, over time, lead to unintended predicaments for inheritors and their families.
Simply put, trust structures often make beneficiaries feel like they were not trusted.
We are all familiar with horror stories of a beneficiary's reckless spending, substance abuse, bad investment decisions or general failure to be a productive member of society. Language in trust documents often strives to prevent the trust from funding these potential consequences. But restrictive terms just as easily cause harmful outcomes, such as resentment or depression.
So how can advisors help families create trust structures that offer protections and tax efficiency, while also remaining flexible and relevant to their current needs? Our latest research explores four strategies to help rethink trust design and honor the wishes of both beneficiaries and grantors.
1. Communicate Intent
The most frequent complaint I hear from beneficiaries is, "I wish I understood what my (parent/grandparent) wanted me to do with the money. What are their hopes for how it impacts me and what are their expectations? And why did they not trust me enough to tell me about it?"
We recommend that families be transparent, up front and honest about their wealth. They can provide validation that having more than others can be uncomfortable and isolating. Talk with your clients about creating a safe space with their family to vulnerably talk about money and how they feel about it.
At age-appropriate times, they should talk about their hopes and expectations related to the money and when and how their heirs will have access to it.
Encourage parents to ask their heirs how they feel — what do they want related to wealth? Take the beneficiaries' preferences and opinions into consideration when drafting legal documents to help ensure that the inheritance has a positive impact.
Legal documents do not memorialize the grantor's intent, thought process, emotions or desires — despite often being articulated to legal counsel when setting up an estate plan. This is why we recommend that clients talk frequently about the money and also capture their thoughts in a "letter of wishes."
This document may include stories about how the money was made, about the family values and the intent the family has for how future generations benefit from the money. It can help guide current and future trustees on wishes related to trust distributions and investment direction.
This context and explanation may be crucial for future generations who did not have the opportunity to hear directly from the grantors or may have never met them.
