I think my parents are well off. What does that mean for me?
At this point in your life, you may have some idea of your family’s wealth from conversations you’ve had and observations you’ve made. To maintain family wealth over generations, it’s important to have open discussions in order to understand what this wealth means for you, your siblings, and future generations.
It will also be helpful to understand your family’s expectations as you enter adulthood. Are you expected to earn your own living and grow your own wealth, or will there be support or a future inheritance available to help you pursue your passion projects (or some combination of both)? There is no requirement that your parents leave the wealth to you. In many cases, parents struggle with the balance of providing support for their children while also not squelching their children’s own ambitions in life. Some initial areas to discuss to help you get your arms around your family legacy and wealth:
Defining purpose for the wealth
What does your family want to achieve with it? Does that include involvement from you and future generations? Understanding this involves defining success, goals, and values for both current and future generations. It’s also a great time to ask your parents for family stories or experiences that should be passed down to support a stronger connection and appreciation for the wealth.
Once you understand your family’s goals and intended legacy, you’ll be better positioned to learn about the strategies that have been put in place to meet those objectives. You’ll also be better able to understand the responsibility that comes along with being a steward of the wealth for your family. There are many approaches to growing and transferring wealth, minimizing taxes, and meeting objectives, whether they be family, business, or philanthropic. Working with your family to understand why they have chosen certain strategies over others will be a useful learning opportunity as you work to understand the different facets of the wealth.
Get involved going forward! Implementing and then monitoring family objectives and strategies should be an ongoing conversation that includes balancing your own ambitions and goals. In the best cases, wealth transfer should strengthen family values and meet family goals—not create burdens for the next generation.
My parents told me that there is money in trust for my benefit. Why can’t I just get the money directly?
Before we discuss why a trust may be used, let’s look at the basic components:
- There are always three parties involved:
- Grantor: the person who originally sets up and funds the trust
- Trustee: the person responsible for managing the trust assets and making distributions to the beneficiaries. The trustee has a “fiduciary duty” which is a legal requirement to do what is in the best interests of the beneficiaries.
- Beneficiary: the person whom the trust is intended to benefit. Often there can be a group of beneficiaries of one trust. In some trusts, the beneficiary may also be a co-trustee.
- The trust document specifies the distribution terms—how the trustee is able to make distributions to the beneficiaries. Often there are no mandatory distribution requirements, just an instruction for the trustee to use their discretion in making distribution decisions. Sometimes grantors specify that some life events should be supported by distributions from the trustee (like starting a business or buying a home).
- A defined set of assets that the trust owns (otherwise known as “held in trust”). Assets are put into a trust by retitling accounts, titles, deeds, etc.
Some benefits of trusts include:
- Estate or income tax savings: depending on the type of trust, this may be the primary driver for the trust or not a factor at all.
- Privacy: when people die, assets that aren’t in trust have to go through a process called probate, which is public and available for anyone to see.
- Protection of assets from creditors: if you are sued or are getting divorced, assets placed in a trust by others for your benefit can be much harder for someone else to take. This is called creditor protection.
- Keeping the money in the family: this is often the place where beneficiaries might feel the most restriction. Frequently, grantors feel more comfortable having built-in protection with a trustee in charge of making distributions. This helps protect the beneficiaries from potentially making a big mistake if receiving a lump sum of cash. For example, an 18-year-old with a $1 million windfall will likely not make the same decisions on how to use that money as a 35-year-old. Keeping assets in trust is intended to prevent your 35-year-old self from regretting something that your 18-year-old self might have done if there was full access!
Additional reading: https://www.lakestreetadvisors.com/protect-your-assets-for-future-generations/
Why do I have to sign this letter saying I can withdraw money from a trust, but I don’t really get to do it?
What you are seeing is called a Crummey Notice. It allows the giver to make a “free” gift into a trust for your benefit. Without the notice to you, the gift wouldn’t be “free” as it would use up some of the giver’s ability to make other gifts tax-free.
Often these notices are issued because of a gift made to a trust to fund life insurance premiums. By not withdrawing that gift from the trust, you are leaving the assets there to either pay the life insurance premium (so the policy doesn’t lapse), or otherwise grow, resulting in significantly more assets potentially available to you in the future.
What is a prenuptial agreement and why should I care?
A prenuptial agreement is a written contract signed by you and your soon-to-be spouse. It typically defines rights you will have to each other’s property, discusses future spousal support in the event of divorce, and addresses the treatment of assets and income acquired during the marriage. Ultimately, it clarifies what assets and debts each person is coming into the relationship with and what each person will be entitled to if the marriage ends. These agreements are useful tools to ensure family wealth remains in the original family.
Often, it’s thought that asking your partner to sign this document means you don’t trust him or her, or that you’re already planning for a divorce before even getting married! Instead, it should be looked at like an insurance policy. No one buys homeowner’s insurance because they think their house will burn down. It is purchased so that in the rare instance there is a fire, not everything is lost!