An alternative to passing assets outright gains popularity.
When a high-net-worth client came in to discuss his
estate plans with Gail Cohen recently, he had in mind leaving his
wealth to his adult children with no strings attached. All were quite
capable of managing their inheritances, he reasoned, and Cohen quickly
agreed. Nevertheless, the general trust counsel of Fiduciary Trust Co.
International in New York suggested that the client consider the merits
of bequeathing his money in trust instead-specifically, in a
beneficiary-controlled trust for each child.
She explained that this trust could provide the heir
with extraordinary controls (hence its moniker), such as the power to
manage trust assets and choose a successor beneficiary at death. In
fact, the beneficiary typically is made co-trustee, with the right to
dismiss the other trustee(s).
Unlike the classic trust format, which usually pays
the beneficiary a portion of assets at specified ages until the trust
is depleted, this trust generally doesn't terminate during the
beneficiary's lifetime. That can help keep the assets segregated from
the heir's personal assets and thus beyond the reach of creditors,
divorcing spouses and federal estate tax, when drafted properly. (Most
legal experts believe that a co-trustee is essential for securing these
benefits.) Assets passed outright enjoy no such protections, Cohen
pointed out to her client, all of whose children are married.
The gentleman had already used his
generation-skipping tax-free amount ($1.5 million for 2005, rising to
$2 million next year), so he couldn't set up his children's trusts as
dynasty trusts, which many grantors do to make the benefits available
to later generations. "We discussed the pros and cons of the trust,"
Cohen says, "and I suggested he talk to his children about providing
their inheritances outright versus in trust. He did, and they went for
the trust."
For financial advisors, presenting
beneficiary-controlled trusts to clients as an alternative to outright
inheritances is only one way to add value to relationships. You may
also be able to help beneficiaries of terminating trusts. Depending on
state law, it may be possible to morph a trust that's terminating into
a beneficiary-controlled trust and perpetuate the protections.
Practitioners say this trust type is currently
popular for several reasons. One is a mounting dislike of institutions
(the traditional trustee) among high-net-worth individuals. Another is
heightened concern about asset protection in our litigious,
divorce-prone society. "Increasingly, people who are leaving wealth
have been through a messy divorce themselves," says Cohen. "A
beneficiary-controlled trust can keep their kids from having to deal
with that."
Observers also attribute the surge in use to a
high-profile, marketing-savvy attorney. In recent years, Steven J.
Oshins, CEO of Oshins & Associates LLC in Las Vegas, has been
writing about the beneficiary-controlled trust in legal journals-he
claims to have coined the term in a 1998 Trusts & Estates article
co-authored with his father Richard-and talking them up at conferences
around the country. Oshins' view (extreme, arguably) is that every
dollar of inheritance should be left in the trust for the beneficiary's
lifetime, with nothing passing outright. To him, it's a no-brainer: The
heir gets asset protection plus functional control over the property.
But Oshins' real genius is recognizing that
significant wealth is, and will be, transferred to heirs who have
asset-protection concerns of their own. If given a choice, might they
prefer to receive their inheritances in trust, rather than outright?
Yes they would, Oshins concluded.
So he and some colleagues created and trademarked
the Inheritor's Trust, a beneficiary-controlled trust they unabashedly
market to inheritors-expanding the market for trust services beyond
grantors, who have been the traditional buyers. "A high percentage of
my clients are adults who are expecting inheritances and who are
setting up a new business [with potential liability], or are afraid of
divorce or creditors," Oshins says.
If you buy that line of reasoning, it's an easy step
to wanting a beneficiary-controlled trust for receiving lifetime gifts,
not just transfers at death. Suppose an entrepreneur could convince a
parent or grandparent to create and fund a beneficiary-controlled trust
with money for him to start a business. Then all the wealth created by
the venture could stay in trust, shielded from predators and estate
tax, Oshins says. "It adds a dimension to business planning that few
practitioners consider," he says.
Drafting Control
Because the heir serves as trustee, a
beneficiary-controlled trust should only be used with highly
responsible heirs who won't withdraw the assets the instant they can.
"You wouldn't want to do this with young heirs or ones who don't have a
sophistication about financial matters," says planner Jim Sprout,
chairman of Northern Colorado for Denver-based First Western Trust
Bank, a private bank. "And capable beneficiaries don't have to be given
carte blanche control," he adds. The trust can be drafted in an almost
infinite number of ways, offering customizability.
An important job for the advisor is to help the
client determine when the beneficiary should assume control of the
trust and the extent of that control, says Stephen Fox, a partner in
the Phoenix office of Los Angeles-based law firm Buchalter Nemer. Even
clients who prefer to impose few restrictions often set an age
requirement for the heir to become trustee. Some add incentive clauses
as well, notes Sprout, such as requiring completion of college.
Another approach is to limit control to certain
assets or decisions. Imagine a client planning to pass two assets: a
family business in which the heir is involved, and a significant
securities portfolio. "The trust could have two subtrusts," Sprout
says. One could hold the business and allow the beneficiary to run it,
while the one housing the financial assets might require the heir to
engage a professional manager, he says.
Other structures can be used to meet different
objectives. To ensure access to the trust assets as needed, give the
beneficiary the power to name, remove and replace a discretionary
distribution trustee-someone empowered to authorize distributions from
the trust at their sole and absolute discretion. (It could even be a
friend.) "That gives the beneficiary indirect control over the trust,"
Oshins says.
Yet control can be curtailed here, too. "One client
wanted to allow the beneficiaries to change trustee only once every
five years," says attorney Nancy Crow, a shareholder at Pendleton
Friedberg Wilson & Hennessey, in Denver. "He didn't want the kids
to be capricious."
For maximum flexibility in the event of changes in
the law or the family's circumstances, Oshins recommends giving the
beneficiary an extremely broad power of appointment. That allows the
original heir to pass the trust on to whomever he chooses (except
himself, his estate, his creditors or the creditors of his estate,
because that would cause estate inclusion) and to dictate the degree of
control the successor beneficiary enjoys. Oshins says, "We give each
generation that power so they can take into account how their children
are growing up."
Family Talk
Advisors with clients for whom a
beneficiary-controlled trust is appropriate may wish to encourage them
to speak with their children before establishing the trust. Otherwise,
says Cohen, the heirs could come to resent their parents "if the
children thought they were going to get their inheritances outright and
then don't, even though there are some great reasons why. Parents
should explain why they're doing what they're doing, so that the
children understand (the benefits)," she says. After all, the goal is
for the heirs and their trusts to live happily ever after.
