Monday, May 12, 2014

Estate Planning: The Benefits of Lifetime Trusts

The primary advantages of using lifetime trusts in estate planning for a very wealthy family are the estate tax efficiencies, the assistance in managing money for the children, income tax flexibility, and creditor protection. While their concern about being paternalistic is a common one, we can create the trusts such that the requirements are not overbearing in that sense while still retaining the positive features that would normally lead one to use such a strategy.

First, there are important estate tax efficiencies that are gained from utilizing lifetime trusts because of GST allocation problems and the avoidable problem of having to calculate taxes by aggregating personal net worth of the children with the inherited amount from the estate. Using trusts to assign certain assets directly to grandchildren (which might be a good idea in Jonathan’s case because he looks like he won’t be needing money from his parents in his lifetime) without subjecting those assets to a second round of estate taxation is very valuable.

Second, the practical consideration of managing the money in the estate after the survivor’s death is not one to be overlooked. A trustee is a professional subject to standards of prudent investing who can be trusted to make sound financial decisions for beneficiaries. Here, there doesn’t seem to be any overwhelming concern because of the relative success and responsibility-level of each of the children. In fact, Jonathan seems like he might do much better than a professional investor, and the girls might certainly perform or exceed that type of performance. However, the paternalism concerns can be balanced here by providing for mandatory (or completely discretionary) distributions or requiring a certain amount of the trust corpus to be wholly distributed by a certain age (or any permutation thereof). Trusts are incredibly flexible and can be adapted to almost any circumstance. For instance, if Sabrina wanted to take money out for a down payment on her first house, she could request it from the trustee who would almost certainly not unreasonably withhold (as long as the trust instrument was written to provide for such a contingency).

Third, the paternalism concerns also should be balanced by the desire to protect assets from creditors; this could be relevant in the case of divorce, professional liability (malpractice liability risk for Beth), and any kind of freak accident. Also, in the unfortunate case where one of the children suffers from a debilitating illness or disability and needs assistance form government agencies, a trust can help beneficiaries from losing access to those benefits.

Fourth, the use of a lifetime trust provides a significant amount of income tax flexibility by not forcing the beneficiaries to be responsible for a huge tax bill on a lump sum inheritance or on income generated by assets they inherit.

Of course, the avoidance of probate and the flexibility of a trust instrument (especially with a decanting provision) are critical benefits with which I am sure you are already well acquainted.

Note: I am not a lawyer yet, and nothing on this blog should be construed as legal advice; it is merely policy analysis of certain aspects of estate planning.