Trusts are for the problem kids – the spendthrifts, the addicts, the ne’er do wells, right? A trust can indeed protect and preserve assets for beneficiaries who otherwise might not manage them well.  But a trust can be valuable for self-supporting, capable kids as well.  And because trusts can be tax-efficient vehicles for passing on family businesses and investment assets, creative advisors are using them in a variety of sophisticated estate planning transactions.  But parents who are thinking about transferring assets in trust will want to remember that a trust, once created, will be part of the family landscape for a long, long time, and they may want to keep these 4 recommendations in mind:

Maximize flexibility

Avoid the temptation to spell out every distribution and manage every investment. You can’t know what life situations the beneficiaries will face, which investments will rise in value and which will sink, or even what the tax regime will look like 10 years hence, not to mention 50 or 100.    Imagine that you are building a framework for decision-making, not a list of decisions.

Trustees matter

Invest (at least) as much time in thinking through trustee selection and succession as in deciding what provisions the trust should contain. As jurisdictions permit trusts to last for longer – in some cases, in perpetuity – the lifetime of an individual is a fraction of the timeframe during which a trustee will be needed.  Forward thinking grantors will evaluate the various mechanisms by which trustees can retire, resign, be removed, and how successors will be appointed.  Should the beneficiary have the right to name a successor and to remove and replace the trustee – which gives the beneficiary indirect control over the trust?  For beneficiaries who might not be capable of handling that power responsibly, those powers can be given to a Protector or even a protector committee (more on that in a moment).

Trustee-beneficiary communication is paramount

A capable beneficiary can use trust assets for education, to buy a house, or even as a tax-advantaged, creditor-protected venture capital fund – provided the beneficiary and the trustee are on the same page about the beneficiary’s situation and objectives.  Likewise, a beneficiary who needs help and support from the trust to manage adversity needs a committed trustee who understands his or her situation and is willing to deploy trust assets judiciously.  Either way, trustees and beneficiaries will want to sit down together regularly to discuss future plans along with the trust basics of investments, distributions and administration.  Grantors can encourage good trustee-beneficiary communication by recommending regular meetings and providing guidelines for trustee decision-making in a letter of wishes.

Consider adding formal governance

While a letter of wishes can provide useful guidance to a trustee, it can’t deal with future circumstances beyond the grantor’s imagination.  Likewise, an individual trustee may not be around when a beneficiary’s circumstances change unexpectedly, or a business owned by the trust is sold and investment of a substantial fortune is required.  When a trust will hold critical and substantial assets – a business, a complex portfolio – the long-term stability of the entire structure may be improved by building in more formal governance, either by creating a Private Trust Company (PTC) to serve as trustee or by creating a self-perpetuating committee as Protector to oversee the trustee.

A trust can be a powerful vehicle for managing complex assets and for providing assistance and opportunity for beneficiaries over generations, but when the trust structure thwarts effective trustee-beneficiary decision-making, or fails to accommodate future circumstances, it can create a quagmire.  Grantors will improve the odds of achieving the family’s vision of success when they and their advisors focus on creating flexible structures that support informed and collaborative decision-making.

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