I have noticed two general perspectives on how to plan for wealth transfer at death. The first group has one objective – do it as simply as possible. The second group analyzes the potential risks, balances that risk with the expense and administrative hurdles of protecting from those risks, and comes to a reasoned determination of the level of protections that they wish to provide.
It is my job to move clients from the first group to the second. If my clients are comfortable with the risks that they are taking, then I am comfortable too. You can’t decide how to plan unless you know what might go wrong. A simple and straightforward estate plan may be the right prescription for you. But a “simple” plan is a solution, not an objective.
When I first meet with new clients about estate planning most of them have not even considered the possibility of placing any protections around the assets that they will leave their beneficiaries. The first reaction to the concept of a trust is often negative. They think trusts are for rich people. They imagine that trusts are expensive to create and maintain, that their children will have limited access to their inheritance, and that a bank trust officer will control their property. Many clients have said that if they leave their assets in trust, their children will think they don’t trust them. So they have never considered anything other than outright distributions. Most people don’t necessarily want to leave distributions outright. They just have bad information and don’t know that there is an alternative that can protect their children and give them control without adding significant expense.
I will not go through all of the possible benefits of leaving assets in trust. But trusts are versatile tools that can accomplish all kinds of different things. They are the Swiss Army knife of estate planning. You can choose how they are taxed, who makes decisions about trust assets, when the decision-maker is removed, who gets the benefit of the trust, how long the trust lasts, and what kind of protections they provide. You can create trusts that protect your children all kinds of potential problems and still leave them in control of the assets.
Unless you are leaving small amounts to competent, responsible adults, I believe that some type of trust is usually a better option than outright distributions. There are three reasons to leave outright distributions. The first is that you do not believe that the risk of any of the potential problems happening to one of your beneficiaries justifies the extra administrative hassle of administering a trust. The second is that you do not believe that the additional costs of setting up the trust is justified by the level of risk. The third is that you just don’t care if the money you worked for is lost.
I can’t quantify the risk of your child getting divorced, filing bankruptcy, being sued, having a stroke, suffering a debilitating injury or being diagnosed with a life-threatening illness. But I have seen all of these things happen many times. Even if the chances of one of these problems negatively affecting one of your children may be low, the potential consequences could be severe.
Leaving assets to your children in trust doesn’t show that you don’t trust them. It shows that no matter how life treats them, their parents cared enough to make sure their inheritance was protected. If you want to consider the best way to protect your beneficiaries, we will be glad to explain the details.