By Melissa Walsh, CFA, CFP®
Part of my role as a Wealth Advisor is to have meaningful conversations with my clients about their financial lives. These are often focused on goal setting and celebrating milestones -- but in some circumstances, we need to talk through more difficult subjects.
One of the hardest conversations to have concerns the surviving heirs. I don’t mean discussing the death of a family member; while tragic, we prepare years ahead of time for that inevitability. I am specifically referring to when a client’s heirs are not prepared for their inheritance, have not heeded our counsel, and have spent through their bequeathment. We work hard to avoid this, but I have encountered the scenario too often after the passing of a client.
It is for this reason that I am an advocate for utilizing carefully constructed trusts to safeguard your legacy. For the benefit of those you leave behind, I’d like to explain the advantages of restricting assets from being entirely and immediately accessed by your heirs.
Sometimes, the perception of trusts is one of over-reaching. “Managing from the grave,” for example, is a term with a negative connotation, implying that someone wishes to exert control even after their lifetime. In reality, though, the intention is to help the next generation flourish. We have written many articles previously that demonstrate how leaving money to heirs turns out to have negative consequences the majority of the time. Most of the time the heirs lose control over those assets within their lifetime! Not the optimal outcome that our clients were hoping for.
A good trust setup calls for us to predict the future, which is, of course, impossible to do, and we find that many clients don’t even wish to try. While I sympathize with this sentiment, I think that parents and spouses can sense who in their lives will be a responsible steward of money, and who may not have the experience and disposition to do so. For those heirs who haven’t proven their financial responsibility, a trust can serve as a hedge against negative outcomes.
As most parents and grandparents will attest, during young adulthood we all grapple with a great deal of mental and emotional development. Trusts help avoid further complicating that journey by allowing trustees to restrict how much money their heirs (the beneficiaries of that trust) can access at a given time. For example, a younger beneficiary may gain access to a third of the trust corpus every five years, beginning at age 25. This gives them an opportunity to utilize some of the funds while they are in the early stages of their career, gaining important experience in managing investments, income, and spending. Trustees can also exercise discretion to make additional principal distributions for education, the purchase of a primary residence, or a wedding, for example. As the heir matures, additional sums are paid out.
In the case of a spouse or older adult who is not ready to receive a lump sum, you may wish to consider a trust that permits only income distributions and limited principal distributions. For example, the primary beneficiary of the trust may have a right to the annual income produced by the investments, along with $10,000 of principal distributions each year, plus any additional principal distributions required for health, education, or maintenance expenses. This structure allows heirs to maintain their current standard of living while limiting their ability to make short-term or irresponsible financial decisions.
There are additional benefits for those with special circumstances, such as including family members of second marriages, minor children, and individuals with special needs or disabilities. Trusts can also be written with language that provides protection in the case of bankruptcy or divorce.
Many people considering whether to create a trust for their heirs delay making a decision until they have concrete evidence about each beneficiary’s level of financial responsibility. My advice is to assume that your heirs will require some guidance; putting assets in a trust allows you to provide them with security for the long term and limit the opportunity for poor decision making.
Working with a well-qualified attorney to draft these documents can leave you with significant flexibility to ensure that you provide for your loved ones without enabling their worst financial impulses. Most trust documents can also be amended later, allowing trustees to add or remove restrictions as the needs and experiences of beneficiaries evolve.
In our role as a fiduciary financial advisory firm, the Allegiant team routinely collaborates with our clients’ accountants, attorneys and other trusted professionals dedicated to protecting assets. Our role is a crucial one both in managing wealth during your lifetime and when considering the legacy you desire to leave for your loved ones. We work closely with heirs to make sure they are prepared, which we consider one of our most important functions as advisors.
For the well-being of your family, please consider utilizing a trust to safeguard your legacy. It would be my pleasure to help facilitate a meeting with an attorney focused on estate planning and trust administration, so that we can be certain to avoid the “hard conversation.”
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Sarasota, Florida 34236
Telephone (941) 365-3745
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Advisory Services offered through Allegiant Private Advisors, LLC, a Registered Investment Adviser