Many people are unfamiliar with trusts or think they are now only useful to the “really” wealthy. In the past, trusts were used as common vehicles to minimize federal estate transfer taxes. With the personal exemption amount now set at $5,340,000 with an annual inflation rider, many trusts are no longer needed to escape transfer taxes.
But, and it’s a big “but,” as high-net-worth families ponder the impact of their wealth on the next generation, there is a need for education. Historically, only 10% of inherited wealth ever makes it to the third generation. This is true across many cultures, and has been reflected in such phrases as “Shirtsleeves to Shirtsleeves” in America or “Rice Paddy to Rice Paddy” in Asia. Research has shown the main culprits are lack of communication and unprepared heirs — not the tax and legal hiccups that many might expect.
As financial planners, we are trained to identify situations where a trust may be applicable. Is there a family member with special needs? Will mom or dad need to enter a nursing home? Or does a child have major spend thrift issues? We also need to look beyond current circumstances and consider the odds that someone in your family will have an addiction issue, a divorce, or a physical or mental disability (not to mention bad business decisions or poor investment advice). When you think about the life events that can erode wealth, it may really be a matter of when, instead of if.
Yes, there are costs to create and administer a trust, but that cost has to be weighed against the loss of capital over generations, due to a host of prosperity destroyers. There also has to be a strong desire to sustain wealth and pass on the values that created that wealth. I believe the baby boomers will redefine this aspect of inheritances. If a trust is not part of your plan, the wealth transfer conversation needs to begin today, so that it is not derailed in the future. This issue can be complicated, and we believe you need a competent professional team consisting of an estate planning attorney, your CPA, and a financial adviser.