Doing It Right
If you’ve decided a credit shelter trust is appropriate, there are several key decisions you’ll want to make about how to structure your clients’ estate plans to meet their objectives. Among the questions you should ask are:
Should the funding be automatic? You might want to force the funding of the trust for several reasons: if you are concerned about who controls the assets, if you want to minimize the risk of losing the exemption or if you feel that the law might change again and pose financial disadvantages worse than the income taxes. However, many attorneys now draft wills that allow the executor to make the call after the first spouse dies. That allows him or her the flexibility to do whatever makes the most sense for the family at the time. I have seen this done both ways with my clients, and the family’s objectives drive the conversation.
Who should be named as trustee? Many people name their spouse and give them full discretion to distribute and use the funds, but this can create problems later on.
Take, for example, a surviving spouse who is named sole trustee of a credit shelter trust for the benefit of her and her children. If that spouse remarries and has additional children, the financial needs of her new family means she’ll spend more of the trust’s assets. And this reduces the chance any of the assets will pass down to the children from her first marriage (especially if they are around the same age as the new spouse).
One possible solution to this problem is to name a co-trustee—a family friend or a third-party corporate trustee—to oversee the use of the funds. In a blended family from multiple marriages, I highly recommend that either a co-trustee or a third-party trustee is used. I have seen situations where the adult children from previous marriages have had issues with the spending of their stepparents because they view the trust as their future inheritance. With this strategy, the adult children have assurance that their stepparent would have to request a distribution and justify the expense to get approval from the co-trustee. While this strategy may generate feelings of mistrust between the spouses when the estate plan is being designed, it can do a lot to reduce the pressure on the surviving stepparent and keep family relations civil after the first spouse is gone.
When And How Much Should Children Inherit?
I spend a great deal of time working with families to determine “how much is enough” and “when is the right time” for their children to inherit any assets. This is different for each family and even for each child depending on his or her needs.
The issue of “how much” is tricky. Some of my clients want all of their assets to be transferred to the next generation, regardless of the amount. Others have concerns about bequeathing their entire estate or have charitable giving goals. With these clients, we work to determine what type of lifestyle they want to provide and calculate a number or percentage that can be drafted into their estate documents. Then we coordinate with their asset titling and beneficiary designations to achieve the desired results.
Regarding timing, some families choose to keep assets in a trust while the children are younger and distribute a percentage of the assets at specific ages. For example, an adult child could receive one-third of the assets at age 30, another one-third at age 35, and the final amount at age 40. This strategy gives children a “trial run” with the money in case they make bad decisions with the first distribution.
Other families choose to keep assets in trust for their children’s entire lifetimes. This strategy allows a family to keep the assets in the bloodline for generations and provides some asset protection in the event of a creditor issue or a divorce.
Working Toward A Favorable Outcome
Good communication within the family is essential. While estate planning decisions may make perfect sense to the parents, they may not make sense to the kids when parents are gone. Once a plan is in place, I encourage my clients to set up a family meeting to let their beneficiaries know how the estate will be divided. Everyone is invited—clients and children from their current and previous marriages. While not a panacea, managing the children’s expectations in advance can reduce a lot of headaches in the future.
At the end of the day, you and your clients must weigh the benefits of control with the downside of force-funding a credit shelter trust, and work with an estate planning attorney to decide what is best for the family.
Annika Cushnie is a Partner and Wealth Advisor at Brightworth.