One of the primary decisions that you will need to make in structuring your estate plan is how to eventually pass on your remaining wealth to your children and other non-spouse beneficiaries after your death or after the second of your and your spouse’s deaths. This Newsletter will review the five (5) options for eventually passing your wealth on to non-spouse beneficiaries, and several important additional points to consider in this decision-making process.

A. Five (5) options for passing your wealth to non-spouse beneficiaries.

Option 1: Passing assets outright.

This is a viable option where you want your planning kept simple, the intended beneficiaries do not have special needs, and they are of mature age. In other words, you believe your intended beneficiaries we be willing and able to act in a reasonable and prudent manner as to utilizing their inheritance.

Option 2: Passing assets in short-term trusts.

Option 2 is similar to Option 1, but your intended beneficiaries have not yet reached the age(s) of sufficient maturity. Normally, this will mean that each beneficiary will receive their inheritance in a separate trust share, to be controlled by your selected Trustee. The Trustee will make sure these assets are properly invested and utilized for the beneficiary’s benefit until the trust is eventually distributed outright to the beneficiary when he or she meets certain maturity age (in a single lump sum) or ages (2 or more installments).

Option 3: Passing assets in long-term trusts.

Long-term trusts are similar to short-term trusts, but they do not end in a lump sum or installments during the beneficiary’s life. Rather, the beneficiary’s (child’s) trust share lasts throughout their life and then any remaining assets normally pass down to the next generation (grandchildren) in trust shares that are eventually paid out in installments. You will also normally give the beneficiary (child) the ability to extend the term of the trust to benefit further generations of family members.

Why have a trust last beyond the beneficiary’s age(s) of maturity? Answer: Asset protection, control, and potential tax benefits. The primary benefit in most cases is an incredible level of asset protection, so that no unwanted outsiders can normally ever get into the beneficiary’s trust share, including protection from spouses in divorce situations, judgement creditors, bankruptcy, and predators. The control benefit gives you the option to have more control of who can benefit, how they can benefit, and for how long. The potential tax benefit (which is sometimes referred to as GST planning) is the ability to pass assets without estate (death) tax beginning when any remaining assets pass from your child’s generation to your grandchild’s generation.

Long-term trusts can feel practically the same to the beneficiaries as receiving their inheritance outright if you make them their own Trustee of their own trust shares (when they attain the set age of maturity), but the beneficiaries will have the added comfort of knowing that their inheritance will be protected for their benefit from unwanted outsiders throughout their lives.

Alternatively, you can select a non-beneficiary as Trustee to serve even after the beneficiary has attained the age of maturity, and this will effectively protect the beneficiary from themselves and from others who may want to take advantage of them.

What level of wealth is sufficient to make long-term trusts a preferred option? Utilizing trusts will increase administrative hassle to some extent and it will increase annual administrative costs, including the need to file an annual trust income tax return, IRS Form 1041, for each such trust. So, we use a rule of thumb to determine when the benefits of maintaining an inheritance in a long-term trust will normally outweigh the extra costs and hassles. If the expected inheritance to pass to each beneficiary (child) is about $300,000 or so, then outside of an imminent creditor or divorce issue, long-term trusts are likely not worth the effort. If the expected inheritance to pass to each beneficiary (child) is $500,000 or so, then these trusts can be pretty good to have, but not a no-brainer to select this option. However, when the expected inheritance per beneficiary (child) is at least $1 million, then this option becomes more of a no-brainer to select.

Option 4: Passing assets in dynasty trusts.

Option 4 is similar to Option 3, but these trusts are intended to continue on for multiple generations until they are no longer needed or desired. In other words, dynasty trusts simply extend the trust’s potentially incredible benefits for multiple generations.

Dynasty trusts were prohibited in Georgia until July 1, 2018, when the Rule Against Perpetuities (RAP) was extended from a safe harbor rule of 90 years to 360 years. The RAP is effectively the time limit on how long a trust can last. While it is highly unlikely that any trusts will last for as long as 360 years, this change in the law makes the RAP limitation practically irrelevant as to any trusts to which this new law applies.

With the long-term trust structure (Option 3), your beneficiary (child) will have to seek legal assistance after your passing to exercise their limited power of appointment if the beneficiary (child) wants to extend the long-term trust structure to benefit their children (your grandchildren) and possibly beyond. With the dynasty trust structure, the beneficiary’s trust share will simply continue generation to generation without any effort on their part.

Because dynasty trusts take more time to draft, they are generally more expensive in terms of attorney fees. Our rule of thumb is to begin recommending dynasty trusts over long-term trusts when the expected inheritance per beneficiary (child) is at least $4 – $5 million. However, the question is really if you think a significant amount of assets will remain after your beneficiary (child) passes. This could be because your beneficiary serving as their own Trustee will likely be a good steward of their inheritance, or a Trust Company or other non-beneficiary is selected as Trustee.

Option 5: Passing assets in community pooled trusts or more flexible supplemental needs trusts for special needs beneficiaries.

If a beneficiary (child) has special needs and either already qualifies for or may one day qualify for means-tested government benefits, then the inheritance for such special needs beneficiary should either pass to a community pooled trust (CPT) account or a flexible supplemental needs trust on their behalf. CPTs are more cost effective when dealing with smaller amounts of inheritance. In both cases, the structure enables the inheritance to benefit the special needs beneficiary without being considered as the beneficiary’s assets or income for means-tested government benefits purposes.

B. Additional points to consider:

1. Choice of Trustee: beneficiary themselves, other trusted individuals, Trust Company, or individual professional.

Choice of Trustee is an especially important consideration in structuring a trust. This decision will help ensure that all goes as smoothly as possible and that no post death disputes occur. Choosing the wrong Trustee could end very poorly. We collaborate with our clients to help ensure that only proper individuals or professional Trustees / Trust Companies are chosen.

For long-term and dynasty trusts, the choice of Trustee decision will also determine if a beneficiary’s trust share feels practically invisible to the beneficiary or if it is set up to better protect a beneficiary from themselves and anyone that may wish to take advantage of them during their lives.

2. Need to favor more flexibility the longer the trust(s) may last.

We believe in drafting trusts for maximum flexibility to deal with all the “what ifs” that may arise over the term of the trust(s). This is an even bigger issue when utilizing dynasty trust planning, since these trusts are structured to last for generations.

3. Distribution provisions: maximize flexibility vs. limitations and mandates.

As stated above, we believe in drafting trusts for maximum flexibility to the extent able. However, some of our clients will want to limit the Trustee’s ability to invest trust assets and/or limit or mandate certain distributions. For multiple reasons learned over our many years of experience, we strongly believe that such limits are often a very bad idea over the term of a long-term or dynasty trust structure. For example, while limiting investment options in a particular manner may make sense today, it may make almost no sense in the distant future. As for mandating particular trust distributions, this may have the effect of turning a fully asset protected trust into a series of vested property rights that an unwanted outsider (creditor, spouse in divorce, or bankruptcy Trustee) could attach.

It is our experience that after a discussion of what normal Trustee discretion looks like in practice over the long-term, clients will often drop the need for particular limitations and mandates.

4. Incentive and disincentive provisions.

Some clients will want to provide for a series of incentives and disincentives to effectively continue parenting from the grave. While this can work well in some cases when drafted in a more general, Trustee empowering manner, this type of drafting can also be a disaster if done poorly. In any case, these trusts can be much more time consuming for the clients to consider their various options and the various “what ifs,” and much more time consuming for the attorneys to draft.

5. Special assets may need special planning.

Where the inheritance may include an interest in a closely held business, a vacation home intended to stay in the family, or other special assets, it is important to carefully plan for all the ‘what ifs.” Without such planning, unintended consequences may end up ruling the day.

If you would like to discuss the best way to pass inheritances to your children and other non-spouse beneficiaries, please call us at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule a consultation. We can discuss your situation, answer your questions and determine what might be the best fit for you. We look forward to meeting with you.