Why I Recommend a Family Dynasty Trust for Estate Planning

In the complex world of estate planning, the decision of how to leave one’s legacy involves a multitude of considerations. After years of guiding clients through this intricate process, I find myself consistently discussing the merits of a family dynasty trust. This approach to estate planning aims to safeguard family wealth within a trust structure for many generations. In this article, I’ll delve into the options available, share my perspective, and weigh the pros and cons of this approach.

Options for Estate Distribution

Navigating estate planning can be a complex, emotional, and highly personalized process. I read dozens of estate plans every year, and each one has unique characteristics. That said, there are three common options that I see time and time again, worth discussing.

One of the most common forms of estate distribution is an outright distribution to heirs. Wills or trusts with this provision direct the executor to distribute all inheritance directly to the named beneficiary. Another common option for estate distribution is what I refer to as an “age-break trust.” Documents with this language will direct that assets be held in trust for a beneficiary until they reach a certain age, at which point, all or a portion of the trust will “break” and be distributed outright to the beneficiary. The final option is called a dynasty trust – with this language, all assets will be held in trust for the named beneficiary, in perpetuity, for the benefit of many generations.

Benefits to Family Dynasty Trusts

For families with wealth, a family dynasty trust should be considered. There are significant benefits offered by a dynasty trust that are lost when assets are distributed outright to a beneficiary. 

Tax Savings

One of the biggest reasons for establishing a trust is for tax planning purposes. When structured properly, dynasty trusts are exempt from federal estate taxes and state inheritance taxes. The federal estate tax is a 40% tax on any assets above the lifetime gift tax exemption. The lifetime gift tax exemption is currently $13.61M per person but is subject to decrease to ~$6M at the end of next year. For historical context, in the early 2000s, we saw this exemption as low as $1M and the tax rate as high as 50%! I point this out to illustrate that although the estate tax may not apply to you today, it could apply to you in the future pending legislative changes. In Pennsylvania, our state inheritance tax is 4.5% for all transfers to direct lineal descendants. Passing assets in a family dynasty trust can shield family wealth from this whopping tax forever. Depending on the size of your estate, utilizing a dynasty trust could save you, your children, your grandchildren, and your great-grandchildren millions of dollars of tax that would otherwise be paid if the estate were distributed outright to heirs.

Protection from Creditors 

Another huge benefit to a dynasty trust is creditor protection. Trust distributions are controlled by someone known as a trustee. A trustee is chosen and named in a trust document by the trust grantor, or individual funding the trust. When the trust is drafted, the grantor defines dispositive provisions. These provisions detail how, when, and why distributions should be made to a trust beneficiary. The trustee is empowered to make distributions for any requests that align with the dispositive provisions and deny distributions for requests that do not align with the dispositive provisions. If beneficiary funds are sought out by a creditor, the trustee can deny the release of funds, creating a robust defense against potential threats such as divorce, bankruptcy, or lawsuits.

Protection from Poor Decision Making

As illustrated above, trusts can provide strong protection from external forces seeking to seize inherited funds. But sometimes, a beneficiary may need protection from internal forces. As hard as it can be to accept, beneficiaries, especially young and inexperienced ones, don’t always make the best spending decisions. We also live in a world where fraud, gambling, substance abuse, and spending addictions are rampant. The trustee of a dynasty trust will only make distributions that align with the grantor’s intentions for the funds and are in the best interest of the trust beneficiary. This layer of protection is meant to prevent trust funds from being squandered so that they may continue for generations to come.

Drawbacks to Family Dynasty Trusts

While there are many benefits to dynasty trusts, no strategy is perfect for every situation, and this is no exception. There are several implications and drawbacks associated with dynasty trusts that families should be aware of when committing to this type of estate plan.

Hurt Feelings 

As an advisor, I see the time and emotional investment that families undergo to draft an estate plan that protects wealth and preserves it for many generations. Unfortunately, the beneficiary is often not privy to these conversations or the decision-making process. All too often, a beneficiary will learn of their family estate plan following the death of a family member. They are often surprised and hurt that their family left their inheritance in a trust – often wondering if this was done because the family doesn’t trust them to make good decisions.

In my opinion, a beneficiary should never find out about an estate plan after a death. I encourage the clients that I work with to have ongoing family meetings, often facilitated by me or another trusted advisor. These meetings are intended to educate and coach the beneficiary on trust mechanics and the family’s intention for the funds. These meetings create a safe space to ask questions, digest information, and create a shared family vision for the future.

Poor Trustee Relationships

The trustee/beneficiary relationship is one of utmost importance. As illustrated above, the trustee has a tremendous amount of power over the day-to-day operation of the trust and these relationships are often lifelong. I’ve witnessed situations where a trustee becomes power-hungry, causes unnecessary headaches or friction for the beneficiary, or simply doesn’t like the beneficiary. This is a bad situation and one that we want to avoid at all costs.

Trustees should be chosen carefully at the drafting of the trust. Oftentimes, families will choose a trusted friend or relative to serve in this role. Other times, they will look to a professional trust company to serve as trustee. Each choice comes with its own set of pros and cons. The most important thing that a grantor can do to mitigate this concern is give the beneficiary the ability to fire and replace their trustee. Depending on the circumstances, a family might also give the beneficiary the ability to serve as sole or co-trustee upon reaching a certain age to further empower the beneficiary and enhance flexibility.

Lack of Flexibility

Occasionally, I will see trust documents that have very obstructive dispositive provisions. I’ve also seen trusts that require the beneficiary to meet certain metrics or standards before they “earn” access to the trust (4-year college degree, six-figure income, a healthy relationship with other family members). This type of language often causes resentment or frustration for a beneficiary who is unable to access money that they feel entitled to.

Access provisions are a very personal decision, and every family has slightly different preferences on how, when, and why a beneficiary should be able to access funds. I’ve included some very common access provisions below:

1. Distributions can be made for health, education, maintenance, and support (commonly referred to as HEMS).
2. Distribution can be made for any reason or purpose.
3. Distribution can be made for weddings, first-time home purchases, or to start or purchase a business.
4. All income generated in the trust must be distributed to the beneficiary quarterly.
5. The beneficiary is entitled to 5% of the trust value each year.

Some families will use all these provisions, and some will use none. There is no right or wrong answer, but I generally encourage my clients to maintain as much flexibility as possible within their trust documents.

Exceptions to the Rule

Financial advice, especially that pertaining to an estate plan, is very nuanced. While I appreciate the benefits of dynasty trusts, it’s impossible to give blanket advice that will apply to every client situation. There are many situations where a dynasty trust may not be the right choice for your family’s wealth. The size of the estate, the makeup of the assets, and the age and situation of the beneficiary will have a large influence on decision-making. Creating a trust can be expensive and the ongoing administrative burden associated with maintaining a trust may outweigh the benefits. If you have any questions about the appropriateness of a dynasty trust for your specific family situation, please reach out to us.[i]

In Conclusion

In the complex landscape of estate planning, the decision of whether “to trust or not to trust” is deeply personal. For families with substantial wealth, the advantages of a perpetual family dynasty trust, from tax benefits to asset protection, make it a compelling option. While it may not be suitable for everyone, careful consideration of the pros, cons, and exceptions can guide individuals toward making the best choice for the enduring legacy of their family wealth.

[i] The creation and drafting of trusts are complex legal processes that require careful consideration of numerous factors. It is highly recommended that individuals seeking to create or amend a trust seek the advice and assistance of a licensed attorney with experience in trust law. The information provided herein is for general informational purposes only and should not be construed as legal advice.

Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 

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Newlywed Bliss!

The first few months of marriage – often referred to as “the honeymoon phase.”, – are characterized by congratulations, tropical vacations, and newlywed bliss. But with the bachelor and bachelorette days behind them, many couples also find themselves venturing into a new version of adulthood. With a shared home, shared bills, and shared responsibility, the need for financial planning has never been greater.

Part two of our Newlywed series summarizes a few of the many financial planning items that newlyweds should consider to start their marriage off on the right foot. For financial planning that a couple should implement before tying the knot, please see part one of our series Financial Planning for Couples Before the “I Do.”

After the Honeymoon

1. Estate and Legal Documents

A critical step that a couple can take to protect their new family is to create an estate plan. An estate plan is a collection of legal documents that protect an individual’s assets, specify who will make decisions in their absence, and determines what will happen to their assets upon their passing. Estate plans can range from very simple to highly complex, depending on the couple’s family, financial, and personal circumstances. At a minimum, every individual should have:

• A Will to indicate where their assets will go at the end of their life and who will carry out their wishes
• A Financial Power of Attorney to define who will manage their financial affairs if they are unable to do so
• An Advanced Medical Directive to specify who will carry out medical decisions on their behalf

Once estate documents are in place, the last step in this process is to determine and update beneficiary designations. Life insurance, annuity contracts, and retirement accounts typically pass outside of the will. These assets need to be reviewed and updated separately from the estate documents to ensure distribution according to your wishes.

2. Financial Goal Planning

Now that the serious (and sometimes somber) business of estate planning is complete, it’s time to dive into something a little lighter – goal planning. In the early months of marriage, newlyweds should take an opportunity to define a shared vision for their wealth, their career, their family, and their legacy. Use this time to discuss and implement a plan to bring that vision to reality.

Newlyweds should discuss career and retirement prospects, visions for raising children and funding their needs, goals for large expenditures (homes, college education, etc.), and even family support and gifting.

Once the goals and vision are determined, it’s time to implement and monitor a savings plan. Ideally, both spouses should be involved or familiar with the matters that impact their financial plan. Even if only one spouse takes the lead in the ongoing tasks of bill paying and investing, each should have a basic knowledge and understanding of the family’s finances and recordkeeping.

3. Postnuptial Agreements

In part one of this series, we discussed the importance of prenuptial agreements as a risk mitigation tool. Both prenuptial and postnuptial agreements empower couples to protect their assets and dictate the disposition in the event of death or divorce. In situations where the couple didn’t prepare a prenup before their marriage, a postnuptial agreement is a great tool to address the needs and circumstances of the couple.

While the documents sound similar on the surface, it’s important to note that in most states, prenuptial agreements are considered more valid and enforceable in a divorce because they are legitimized while two individuals are still financially separate and independent. The moment that the couple utters “I do,” many assets become marital property even if the title of the assets remains unchanged. These might include retirement assets, stock options earned during the marriage, and real estate purchased after the nuptials. Bearing that in mind, a postnup offers significantly better protection than no agreement at all.

A postnup can also address significant changes in circumstance (inheritance) or if previously unknown knowledge about one spouses’ financial situation surfaces.

Happily Ever After

Financial planning is fluid and ever-changing. Estate documents, pre/postnuptial agreements, and financial plans are not set-it and forget-it matters. Review your legal documents and financial plan on an ongoing basis, especially if you experience a significant change of circumstance (new family members, loss, inheritance, etc.). Here’s to Happily Ever After.

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It’s Wedding Season!

In many parts of the country, we are approaching peak wedding season. In preparation for their wedding, most couples are busy carefully selecting color palettes and crafting seating charts. It’s easy to put something as unromantic as financial planning on the back burner. Nevertheless, one of the most important things that a couple can do to start the marriage off on the right foot is align their financial future.

This guide is not your standard newlywed handbook filled with sentimental pieces of advice such as “don’t go to bed angry.” This handbook summarizes a few of the many financial planning items that couples should discuss and consider before tying the knot.

Before the “I Do”

Financial Disclosure Meeting

Before the wedding, a couple should sit down together for a formal “financial disclosure” meeting. In this meeting, the couple should fully disclose income, assets, liabilities, credit score, and most importantly, their vision for their wealth. This meeting is an opportunity for the couple to set their expectations and boundaries around money and align their vision. Discuss each individual’s feelings around operating on a budget, savings and investment goals, and comfort level holding debt.

Debt can impact your financial status as an individual and a couple. If one individual holds significant debt, address a payment plan. The couple needs to decide if they will manage this debt as a unit or if it’s the sole responsibility of the incurring party. Like many things in life, there is no right or wrong answer – the choice is dependent on the couple’s wants and needs.

To the extent that there is significant family wealth, expected inheritance, an interest in a trust, or a family business, address these items with family and advisors first. There may be current or future assets off-limits to a future spouse, and a prenuptial agreement will come into play.

Asset Titling

Next, the couple should agree on how they wish to title their property. Should they maintain individual accounts, commingle their assets into one joint account, or hold a mixture of both? It depends on each couple’s unique circumstances, but there are pros and cons to each option.

Titling assets in joint name allows both parties free access and visibility to the accounts and promotes communication and trust (the foundation of any good relationship!). Shared accounts also simplify the budgeting process and ensure accessibility to money if one spouse becomes incapacitated. Despite the benefits, it also carries the risk that one party frivolously spends or even drains the shared account, leaving the other spouse penniless.

Alternatively, separate accounts foster autonomy, freedom, and financial independence for both parties. Another benefit – if one spouse carries debt, any assets held in the sole name of the debt-free spouse are out of the reach of creditors, while money from a joint account is up for grabs. Lastly, maintaining separate accounts can protect individual assets from division incident to a divorce.

Prenuptial Agreements

Speaking of divorce, no newlywed handbook would be complete without mention of the prenuptial agreement. The word “prenup” often carries a negative connotation – after all, it implies one is thinking about the end of the marriage before it’s even begun. On the contrary, these agreements are an important risk mitigation tool that can save a lot of time, heartache, and money in the event of death or divorce.

Absent a prenup, each state determines how assets and liabilities acquired before and during the marriage will be shared and divided. Couples should determine if they live in a community property state or an equitable distribution state and understand the implications of this status on property division. If the laws around property division are inappropriate for the couple’s circumstance, they should consider drafting a prenup agreement.

Many couples mistakenly believe prenups are only necessary for individuals with substantial assets, mismatched earnings, or children from a prior marriage. While those situations certainly merit a prenup, anyone that wishes to protect their assets or control the disposition should have a prenup.

A quality prenup protects income and assets earned during the marriage and unearned income from a future bequest or trust distribution. Many prenups specify a future alimony amount or eliminate it altogether. Prenups can even assert desires for who retains custody of the family pet.

A word of caution – not all prenups are created equal! Timeline, representation, and transparency play a huge factor in the agreement’s legitimacy in court. The strongest prenups are written at least six months before the wedding, with both parties maintaining separate, competent legal representation and fully understanding the terms of the agreement.

After the Honeymoon

The need for financial planning doesn’t end when a couple walks down the aisle! Look out for Part II of our Newlywed Handbook for financial planning items that couples should discuss and consider after the honeymoon.

Disclaimer

The importance of having good credit reaches far beyond the ability to buy a car.

Good credit will allow you to rent an apartment, open a credit card account with a premium rewards program, or simply open a cell phone or cable account. Without it, you will likely have to pay a security deposit just to turn the lights on, if providers are willing to set up an account at all. It’s also become common practice for potential employers to review a job applicant’s credit history as part of the hiring process.

Having good credit is essential for anyone who wishes to establish an independent life. Fortunately, there are a number of ways parents can help their children establish good credit. There are also methods one can employ to establish and build good credit without any assistance.

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