To Trust or Not to Trust? (that is the question)

Yes, that is the question! To break that question down further: Should I leave my children to their own devices with their inheritances, or should I put their inheritances in a trust? If I put my children’s inheritances in a trust, will they think I don’t have faith in them? These are hard questions that require some soul searching to answer, and different families will answer them differently. Certainly, no parent wants his or her child to resent the estate planning they have done and any trusts they have created. Especially where in almost all cases the children are the reason the parents are doing estate planning in the first place.

In some cases the answer to the trust or no trust question may be simple. For instance, if a child is wrestling with disability or a substance abuse or gambling problem, or perhaps is just not able to wisely manage money, a trust may be a necessary thing. Or a child may be in a very high risk profession – such as an orthopedic surgeon - and may want to have a trust to protect his assets against lawsuit creditors. Or a child may have substantial assets already and may not expect to need an inheritance. In that case a trust can be used to protect the assets for grandchildren – and to escape estate taxes in the child’s estate.

The harder case is where children are squared away people, taking care of and supporting their own families, and where they might resent having to go to a trustee for a distribution from a trust. In this case, how does a parent explain to a child why he or she thinks their inheritance should be in a trust?

Well to start, every family is different and every case needs to be approached in its own distinct way. The discussion can start by explaining that trusts can provide family security and peace of mind. A trust can protect against property settlements in divorce. If a child has a new or an at risk marriage the child might welcome a trust as a hedge against the risk of divorce. And it should be noted that bad things can happen to strong, self-sufficient people that are outside of our control, such as accidents, health problems, lawsuits, bankruptcy, and financial market reversals. Also the child might welcome the idea of a trustee to consult with who is a trusted family member or professional adviser and who has a fiduciary duty to always act in his or her best interests. A properly managed and invested trust can be expected to lessen the severity of life’s setbacks and is expected be there as a safety fund during and after the storms have passed.

As you might have gathered, we favor trusts to hold children’s inheritances – because we are inherently cautious about the risks of the modern world and we think steps should be taken to lessen those risks. But we understand the other perspective too. We have worked with clients who have instructed us to draft documents which provide for distribution of inheritances directly to their children with no trust. They have expressed to us that if a child loses his inheritance – well then - that is his or her problem. They have faith their children are prudent and will take steps, such as prenuptial agreements and insurance, to protect themselves. They don’t want to be a long arm reaching from the grave to control what their children do after they are gone. And that is a perfectly valid approach too.

What is important though is that you think together with your advisers and family about which philosophy (trust or no trust) is best for you and your family. This post will hopefully help you to frame your thoughts and give you strategies for thinking about these important questions.