We support our children through the bumps and bruises of childhood, the awkward teen years, the stress of college and then they launch and we hope for the best. They marry and have children and we lovingly throw ourselves into the joys of grand parenting, showering our grandchildren as if they were our own with gifts, vacations…..anything and everything!. But what happens in the unfortunate event of divorce. How can we avoid sharing our wealth with their now-ex spouses if that is our intention?
I have watched a trend among high-net-worth clients who now navigate the possibility of their children’s divorce. In the past they would have used trusts to protect estate assets, possibly protecting them from distributing assets to their children when they are too young or inexperienced. Today they are still using trusts but the provisions are changing. Instead of telling trustees to distribute income or assets at specific times or under specific conditions, such as attaining a age 25, 30 or 35, they are not mandating distributions at all. Today they are giving more discretion to the trustee possibly delaying the distributions until the trustee determines it appropriate.
For example, instead of an adult child getting a pre-set amount, say 50% at age 30 or 35, the decision is now strictly left to the trustee’s discretion. Parents make this decision to retain trust assets because, when distributed, the assets immediately become subject to creditors, ex-spouses and more. Given the fact that today, most marriages occur later in life, this trustee discretion amounts to a way for parents to do some prenuptial planning for their children. Later marriages result in later divorces and parents take on the risk of losing assets if the divorce of their children happens after their death. If trustees have discretion and choose not to distribute assets then the trust assets remain with the trust and are not affected by divorce. Divorce is still commonplace, so it makes prudent sense that wealthy and even middle class families put measures in place to protect family assets.
All of this does not mean the beneficiaries lose the benefit of the trust assets. If the trustee is given total discretion to make distributions both interest and principal, the beneficiary simply needs to ask. More likely than not, if the trustee selection has been made carefully, when asked the trustee will most likely comply. Also the grantor of the trust could give guidance as to what circumstances the trustee should make distributions, the funding of a grandchild’s education, for example.
Giving this type of discretion to trustees also provides creditor protection to the beneficiary. Because the beneficiary has no control over the asset, the ownership belongs to the trust not the beneficiary. This has the added benefit of protecting adult children from themselves or ventures that they might otherwise not enter into because of the risk they might pose to family assets. The beneficiary does have the extra step of requesting the distribution but the benefit of the extra step may outweigh the inconvenience.
When distributions are made it may also be wise to educate the beneficiaries as to how to keep the assets separate from their joint accounts. Family communication in using these tactics is imperative lest the beneficiaries misunderstand the parent’s intentions. Parents need to explain to their adult children why the trusts are being established with these provisions. Otherwise it may be seen as lack of trust on the part of the parents for their kids.
But what if a trustee becomes unreasonable? After all you are putting a lot of power in the hands of this individual. Establishing procedures for this contingency can be included in the trust agreement. Otherwise the beneficiaries have no choice but to petition the court. And in that case, the beneficiary would need to offer proof for the reason the trustee is being removed, such as mismanagement of assets, not complying with trust terms or self-dealing. Language can be included in new trusts or reviewed in established trusts to determine the parameters for removal.
Times they have changed and the changes require new thinking around trusts for our children.