You do an estate plan. It makes your life better (see, The Estate Planning Guide to Better Sex). Eventually, you die. Then what? You avoided probate, minimized certain taxes, and passed wealth on to the next generation with your estate plan. Now there are other issues. What is the wealth going to do to the next generations? Will it be a blessing or a curse? Will there be conflict in dividing it up, or will everyone get along? Will your wishes be honored and respected, or will the next generations use conflict and litigation to try and get a bigger piece of the proverbial pie? How much of the estate is actually going to stay with the family, and how much is going to be squandered on optional taxes, legal fees, substance abuse, ex-spouse’s, poor business decisions, medical crisis, and self-indulgent immediate gratification? Is it a good idea to give future generations tools and training to prevent and avoid such troubles, or is it better to just let things happen however they will? Which is best?
Dynasty Estate Planning, sometimes called Legacy Estate Planning, unlike typical estate planning, is about implementing positive solutions in response to the “now what?” questions. It is not about “ruling from the grave.” Rather, it is based on the premise that most people, given the right tools, will have the capacity to manage their affairs in a healthy and beneficial manner, but even the brightest and best of people, deprived of the right tools, will have no defense against certain wealth destroying difficulties. Dynasty Estate Planning is all about leaving future generations not just economic wealth, but also powerful resources to protect themselves and the wealth over time.
Here are seven hallmarks of Dynasty Estate Planning. Check to see if your trust and related structures have such provisions. Is so, congratulations! If not, and if you care, it’s time to consider an upgrade.
There are two ways conflicts can be resolved: by agreement or by coercion (through the courts). I’ve seen and used both. Consent is always better, and costs less. Lawyers who have a profit incentive to go to court sometimes see this differently. Families who end up suing each other almost never recover as a family unit. The family is destroyed by lawsuits. To avoid this, trusts and other elements in Dynasty Estate Planning will require the parties to resolve their disputes outside of court. This has long been recognized by the courts, and is increasingly acknowledged by statute. Complying with alternative dispute resolution requirements can be a condition of participating in the benefits of an estate, even if the beneficiary did not expressly sign such an agreement.
Most of the time, an inheritance does not arrive until the beneficiaries are at or near retirement age. One generation tends to pass in their 70’s or 80’s when their children are in their 50’s or 60’s. This means the inheriting generation has already had their careers, raised their children, purchased their home, and so on. The inheritance is a nice help at a critical time in life, but when things go as they should, it will be invested and enjoyed, not consumed. The result is that the inheritance will ultimately go to more than one generation. That being the case, Dynasty Estate Planning anticipates this, and provides tools and resources to optimize it. It takes advantage of GST exclusions and jurisdictions that have abolished or limited the Rule Against Perpetuities. By avoiding or minimizing transfer taxes at each generation, the growth in the value of your estate over time will be exponential instead of merely linear. If that does not mean anything to you, ask an engineer or a financial planner. It will mean a great deal to them.
A spendthrift clause generally allows a Trust to protect its assets from claims against a beneficiary. Except for certain asset protection trusts, a spendthrift clause will not protect a grantor’s assets from the grantor’s liabilities. A spendthrift trust works best when inherited. Sadly, this ancient and often used provision frequently fails. A spendthrift clause can be defeated by poorly thought out distribution provisions. If distributions are mandatory or happen automatically upon reaching a certain age, the spendthrift provisions are subverted. Also, the Trustee must have the power to disregard any involuntary demands for distributions by such a beneficiary. A spendthrift clause is a vital part of protecting an inheritance over time, but without the proper framework, it is useless. A well implemented spendthrift clause is not about insulating deadbeats from their own folly, but is all about protecting innocent beneficiaries from predatory and frivolous claims.
Most entry level estate planning documents distribute the entire estate once the probate avoidance and estate tax goals have been accomplished. The effect of this is that the protection a well crafted trust can provide is completely done away with. For a trust to protect assets with spendthrift provisions, the assets must stay in the trust. This requires some mechanism other than having a birth day for making distributions. Age is a poor predictor of when a person is in a good position to receive a distribution. Older may be wiser, but may also have its own risks and issues. The bottom line is this: distributions should be discretionary, not mandatory. The grantor may set the scope of discretion either broadly (permit distribution of both principle and income) or narrowly (allow distributions of income only, or a fixed percentage, or a specific dollar amount). The size and nature of the estate as well as the family dynamic are important factors in setting the scope of discretion. The most important factors in setting the scope of discretion, are the things that matter most: those underlying values and true principles by which you have governed your own life. The discretion for distributions in a Dynasty Estate Plan will be an expression of your vision, and a manifestation of who and what you really are.
Having a Trust Protector is like having a designated mechanical engineer to fix problems when the trust machine breaks down. All machines break over time, even trusts. All trusts are vulnerable to political ambush (unanticipated changes in the law), unintended ambiguities, the potential for misbehavior among the parties to the Trust, and sabotage of the Grantor’s intent by those with a different agenda. A Trust Protector can fix such problems. Generally, because of the technical and tax issues a Trust Protector must address, I prefer to name the attorney who drafted the Trust instrument, or another qualified licensed professional with the training to address the issues.
There are many kinds of protection that a Trust can provide. If a Trust is going to function over multiple generations, it is important to load it up with the tools that may be needed in the future. Such tools will address issues like an incapacitated beneficiary, or a non-U.S. Citizen beneficiary, or a beneficiary’s divorce, or a branch of the family having no issue, or ownership of various kinds of business interests, or how the family will support and engage in making the world a better place through charitable giving, etc., etc. The down side of a trust loaded with a full tool box is that it will be longer and more difficult to read. The upside is that it will be more likely to have a tool to address future problems privately and without judicial intervention. Since we know problems are inevitable, putting tools in the wagon to take on the journey “just in case” so problems can be fixed as they arise simply makes sense.
Too often, estate planning is done as a separate enterprise from business planning. The result is a disconnect between business succession and the estate, which will increase the costs, the taxes, the delays, the complexity, the risk of business loss or failure, and the aggravation. When the business planning and the estate planning are “integrated” the pieces all fit together, and compliment each other. The trusts own and manage the succession of the business interests. The business interests are structured under the trusts in a tax efficient manner that also manages the risk. Too often business owners meticulously plan what type of business entity they should use to minimize their current taxes (S-Corp, C-Corp, Partnership, LLC, etc.), without giving any thought to the equally important question of how that business entity should be owned to minimize taxes and exposure to liability over the long term, and to prepare for future succession.
Dynasty Estate Planning enables wealth to flow like a river through many generations, watering each in turn. Instead of being dried up and consumed into oblivion, the river grows over time as each tributary generation pours their own new wealth into the flow. These are some of the highlights found in Dynasty Estate Planning vs. typical estate planning. There are more to be addressed another day. If leaving your family the tools to protect themselves and their inheritance does not matter to you, reading this article did not help you. If that does matter to you, do something about it. Review your documents and structures. Have us review them for you. If you have no such planning in place, taking action now. Sooner is better than later. The value of Dynasty Estate Planning increases with time.