Preserving Your Family's Legacy

A values based approach to estate planning

Many affluent couples are concerned that once they're gone, the money their children receive may not be put to the best use. They fear their children could lose their inheritance through divorce or bankruptcy, or simply waste it away while pursuing bad habits. If their estate is large enough, they worry about turning their children into trust fund babies - ne'er-do-wells who, cushioned by the family nest egg, will lack the incentive to do something productive with their lives. These fears are justified. Statistics show that the younger generation - including baby boomers - has a one-in-two chance of experiencing either a divorce or bankruptcy in their lifetime. And many of us know of at least one trust-dependent soul who lives from one trust distribution to the next, a victim of parent-created affluenza.

Fortunately, you can plan for and avoid these issues with your own children (and grandchildren), by applying a values-based approach to the thoughtful drafting and design of your estate plan.

First, let's look at some of the ways you can transfer wealth to your heirs:

Outright Distribution: An outright distribution is just that: mom and dad die and their children receive their inheritance outright, in one lump sum. Simple, clean, and dangerous. On average, an inheritance will be gone within 18 months of a child receiving it. And it doesn't matter how old the child or how much the inheritance. If a child gets divorced or goes bankrupt, the inheritance could be lost.

Step-Distribution: With this arrangement, the inheritance is distributed to a trust, with built-in speed bumps - to help slow the speed at which the trust funds are depleted. For example, one third of the principle might be payable to your child at age 30, one half at 40 and the remainder at 55. Unfortunately, this approach adds little asset protection, and, once the principle is gone, it's out of your bloodline and gone forever.

Lifetime Trust: With this type of trust, the child's inheritance is distributed according to various guidelines and incentives that the parent provides in the trust document. The message? Adhere to the guidelines and philosophies of the trust and assets will flow; get into trouble and the trustee can stop the flow. The trust holds and manages the child's inheritance for the life of the child, or until all trust funds have been distributed. An independent trustee is usually chosen to manage the trust and many times the child can serve as co-trustee. (When the child dies, any remaining assets in the trust can pass to the child's heirs or other individuals or entities.)

The lifetime trust provides the most flexible vehicle for values-based legacy planning - with incentives, guidance and protections for your children. It also provides valuable asset protection - in case your children encounter difficulties during their lives, such as drug abuse, lawsuits, bankruptcy or divorce.

To better understand how a lifetime trust works, consider a hypothetical family, Tom and Sally Ray, and their children John and Jane. Tom and Sally wish to set up a values-based estate plan that leaves their assets to John and Jane. The Rays' family values include professional achievement, academic excellence, a spiritual home life, social contribution, financial responsibility, community involvement and devotion to family. We would begin with a customized, comprehensive joint revocable living trust. By transferring all their assets to the trust, probate would be avoided. Further, the trustees they designate would, upon their death or incapacity, maintain full control of their property.

In order to provide the greatest amount of asset protection and guidance for the Ray children, we would create a lifetime trust for each child that springs into effect once both parents have passed away. A trustee would serve as the gatekeeper of the trusts, with discretion over when and how to release the monies in the trust. The trustee would be guided by instructions and values that Tom and Sally draft into the trusts.

These instructions could permit the trustee to distribute trust income and principal to each of their children for their needs (health, education, support) so long as they are living by the family's values. If a child gets into drugs, gambling or has other problems, the trustee would be instructed to turn off the faucet and stop the flow of money - refuse to distribute assets from the trust until the child shapes up, cleans up and gets back on track. Meanwhile, the trust would allow the trustee to redirect the trust's assets to assist the child by paying for counseling, drug testing, or whatever is necessary to help the child get back on his feet.

The Rays would also include extensive guidelines and values for their children in each lifetime trust. For example, they might direct that their trustee assist each child by distributing income and/or principal out of a trust for:

• Expenses while either child is a full-time student maintaining at least a 2.5 GPA.
• Living expenses for a flexible but finite period of time after college graduation, if John or Jane is actively looking for a job.
• The reasonable expenses for Jane's first wedding and John's first honeymoon.
• A down payment towards purchasing and furnishing a home.
• A down payment towards purchasing or establishing a business or professional practice.
• Travel to foreign countries for cross-cultural experiences and education.
• Expenses while either child is pursuing an educational, scientific or charitable goal which is in the best interests of the child and the public, and which makes the child a productive member of society.
• Living expenses if a child becomes disabled and is prevented from being a productive and self-supporting member of society.
• Expenses or income replacement if a child is occupied in full-time caregiving for family members such as children or other relatives and that obligation precludes the child from earning a living (a stay at home parent, for example).
• Supplemental income and expenses if a child is employed full time and earning at least a specified amount per year, or is pursuing a career which is low-paying but socially productive, such as a missionary, teacher or social worker.
• Any other extraordinary expense that is deemed to be in the best interests of the child.

Additional language could ensure that the trustee would consider the future probable needs of the child — for example, educating the child on the long-term tax advantages of retaining funds inside qualified plans, IRAs and such.

The Rays' goal was to set up their estate plan so that the wealth left to their children would provide a positive structure within which Jane and John could make the most out of their lives. By using lifetime trusts with detailed instructions, values and guidelines, the Rays would succeed in protecting their hard-earned wealth while providing their children with invaluable guidance. These forward thinking actions can even create a legacy that benefits their descendants for generations to come.

© 2004 by Deborah S. Bucksbaum
Adapted with permission from an article by Eden Rose Brown, J.D., Salem, Oregon.