8 ways a trust can ensure that your family finances leave a legacy

You cannot be both young and wise, Stephen Colbert once said. Agree with Colbert or not, it’s a perspective you should keep in mind when figuring out how to leave your wealth — and legacy — behind.

Tags: Assets, Estate planning, Planning, Trusts
Published: April 05, 2018

The effect of wealth on the human psyche can be profound, sometimes in negative ways, particularly for young people just starting to build an identity.

“Self-worth is very different from net worth,” says Michael Bailes, a trust officer for U.S. Bank Private Wealth Management. “Net worth that is predominantly generated by an individual takes on a very different meaning than inherited wealth.”

Few young people with inherited wealth truly understand the journey that led to their good fortune, Bailes explains. If you’re preparing to leave wealth to your descendants, you may fear your gift will leave them with an inflated net worth but diminished self-worth.

 

Protect your family and money with a trust

A trust can help protect your family and money.If set up properly, a trust allows you to define distribution and use of funds rather than simply leaving an inheritance.

Here are eight ways to potentially plan a trust so you may feel like you’re doing right by your descendants — and creating a lasting positive legacy.


1. Create a meritocracy.
At each stage in life, the benefactor can influence certain behaviors for his or her descendants, such as basing trust distributions on school performance or success. This can be a powerful tool for helping to establish productive traits early in adult life. “Let’s say John is attending college,” Bailes says. “If he achieves a 3.0 grade point average, he receives a certain amount of money from the trust for living expenses. But if that GPA is not achieved, a lesser amount is distributed.”

 

2. Give them incentive. This motivational tool is similar to an employer matching contributions in benefit plans to boost employee savings. “The trust could state that the benefactor’s grandchild will receive a principal distribution up to 50 percent of the beneficiary’s adjusted gross income for the previous year to be distributed in quarterly installments,” Bailes says. “This encourages the beneficiary to earn a living.”

 

3. Trust in education. Similar to making distributions based on a beneficiary’s salary, a trust can be a priceless source of education to beneficiaries: The benefactor can attribute a matching contribution to a beneficiary’s college savings plan.

 

4. Embark upon a philanthropic journey. If you’d like to get your beneficiaries interested in charitable work, a trust can include language that incentivizes philanthropy. “The benefactor can make gift-giving a prerequisite for any future distributions or make board participation a necessity,” Bailes says.

 

5. Foster family reunions. To encourage family bonds, a trust can be granted the power to distribute funds for a family reunion every few years to help solidify the extended family.

 

6. Reward good behavior. You can state in the trust document that no distributions will be made if the beneficiary engages in behaviors you want to discourage. For instance, you could take away distributions for taking illegal drugs or being convicted of a felony in the last 12 months.

 

If set up properly, a trust allows you to define distribution and use of funds rather than simply leaving an inheritance.

 


7. Defer to age.
Age-based distribution provisions are fairly common in trusts. For example, it could specify that a beneficiary should receive one-third of the trust at 25, one-half at 30 and the rest at 35. “It might make sense to have principal discretionary provisions available to the beneficiary during younger years for certain purposes. However, distributions of large sums of money may result in a more advantageous outcome when reserved for a more mature, established adult,” Bailes says.

 

8. Distribute money to your family based on milestones. You may be considering tying distributions to achievements or life stages: graduating from college, buying one’s first home, getting married, having children. However, Bailes cautions that without careful controls, this strategy might not have the desired effect: “One would not want a beneficiary to get married or have a child solely because they would receive $100,000,” he says.

 

No matter what you do, communicate your wishes

“These ideas help a benefactor think about how they might achieve a desired effect when drafting a trust document,” Bailes says. “It’s particularly important that a benefactor communicates their wishes clearly to the estate planning attorney and the future trustee.

“Because this strategy can put additional pressures on a future trustee in executing the benefactor’s plan, it is important that as much information is communicated as possible to avoid any confusion.”

 

Ready to discuss your wealth legacy? Contact a wealth advisor to learn more.