What the Next Generation Needs to Know
You’ve set up a trust — or are planning to — for your children or grandchildren. With these assets, you intend for your children to have a safety net 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 their trust. And we hear just as many questions from beneficiaries about how their trust actually works. No matter which side of the trust you’re on, it’s 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, here are four key 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’s or grandchildren’s educations. Trusts can also give their assets creditor, divorce and liability protection.
When the trust’s beneficiaries understand why the trust was created, they’re in a better place to become good stewards of the trust.
This is also a great time to improve your beneficiaries’ 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, such as philanthropy, with future generations, and this desire is served by providing a strong financial education for beneficiaries in order to help them be responsible with 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 issues with the IRS.
A good estate planning attorney will draft the trust documents and create a memo listing all requirements and timelines 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 at which 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 any beneficiaries on them so that they fully understand how the trust operates.
3. What their fiduciary duties are, if any
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 the trustee — especially when there are other beneficiaries of the same trust.
It’s vital to educate your future trustee on a 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 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 critical to beneficiaries being able to use the trust responsibly.
How often do you review your estate documents?
One of the most impactful 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.
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, Creative Planning is here for you. For more information, schedule a call with a member of our team.
