Co-authored by David Elyashar, CPA, CVA, Partner and Family Office Practice Leader at Wipfli LLP.
The following article was prepared in collaboration with our affiliate, Wipfli LLP. With more than 2,400 associates across the United States and in India, Wipfli ranks among the top accounting and business consulting firms in the nation.
You’ve set up a trust — or are planning to — for your children or grandchildren. With protected assets, your children have a safety net that they can rely on and even pass down to the next generation. Nothing to worry about anymore, right?
We hear a lot of concerns from clients about their children potentially squandering or living off of their trust. And we hear just as many questions from beneficiaries about how their trust actually works. No matter what side of the trust you’re on, it is natural to have questions and concerns.
In the end, it all boils down to education. If you’ve set up a trust fund for your children or grandchildren, it’s critical to give them the education they need to not only understand the trust but also use it responsibly.
To that end, we’ve put together the top four areas we recommend educating the next generation on.
1. Why the trust fund was created
Trust funds are created for a wide variety of reasons. Maybe you want to remove assets from your estate to reduce its tax liability upon your death. Maybe you want to establish a source to pay for your children/grandchildren’s education. Trusts can also give the assets creditor, divorce and liability protection.
When the trust’s beneficiaries understand why the trust was created, they are in a better place to become good stewards of the trust.
This is also a great time to improve their financial literacy in general. How well do they understand the value of money and what they could inherit? Do they understand what the trust’s assets are and how the trust is funded? Do they understand investments?
Many parents and grandparents want to share their family values with future generations, such as philanthropy, and this goes hand-in-hand with a strong financial education for beneficiaries to be responsible with the trust assets.
2. What the trust’s rules and restrictions are
Depending on how the trust fund is structured, there are rules that everyone, especially the trustee and beneficiaries, need to know. If those rules aren’t followed, it can negate the benefits of creating the trust in the first place.
For example, some trusts require the beneficiaries to take distributions based on the income the trust is generating. If they don’t, there can be legal issues or even issues with the IRS.
A good lawyer will draft the trust documents and put together a memo listing all requirements that need to happen and the dates they need to happen by, so that everyone involved understands how the trust works and what actions are required of them. When the children or grandchildren take over the trust, they especially need to know what their duties are and what rules they need to follow.
It’s also important to educate trustees and beneficiaries on what restrictions the trust has in place. Many trusts dictate the age that the beneficiary can begin taking distributions. Sometimes, if the beneficiary is perceived as not mature or responsible enough, this age can be set over age 25 or 30, for example. You can also put rules in place on how the money can be used and how often distributions can be taken. Regardless of what the restrictions are, it’s important to educate the beneficiaries on them so they fully understand how the trust works.
3. If they’re the trustee, what their fiduciary duties are
The beneficiary of the trust fund doesn’t have to be its trustee once they come of age, but if they are, there are responsibilities that come with being trustee — especially when there are other beneficiaries to the same trust.
It’s vital to educate them on the trustee’s duties, especially the fiduciary duty to only act in the best interest of the beneficiaries. When they come of age, beneficiaries may be able to sue the trustee for breaking this duty and mismanaging the trust’s assets.
4. When it’s best to use the trust fund
How does the trust fund fit in with the beneficiaries’ other assets? Depending on things like income tax and estate tax considerations, sometimes it’s either more or less beneficial to take distributions from the trust versus using other assets. Knowing what these situations are and what actions to take is a critical to beneficiaries being able to use the trust responsibly.
How often do you review your estate documents?
One of the biggest recommendations we can make outside of educating the next generation on the trust you’ve set up for them is to review the trust documents — and your overall estate plan — every few years.
Sometimes people who execute trusts forget what they signed on the dotted line for — things like what the administration requires and how the trust is funded. Reviewing these documents can help you in educating the next generation on the trust and in the four areas discussed above.
Revisiting trust documents also helps you make any changes that may have become necessary since you formed the trust. Circumstances change. You want to make sure the trust you’ve set up can change with those circumstances.
If you have any questions about how to set up a trust, educating the beneficiaries of a trust you’ve set up or reviewing trust documents, contact your legal or other professional advisor, or reach out to one of our advisors at Wipfli Financial.
You can also keep reading on in these related blogs:
Transferring assets at death: Revocable living trusts
Smart estate planning strategies for women
Alternative inheritance strategies for blended families
How special needs trusts and ABLE accounts work together