16 June 2019

Why Estate Planning for a Distant Future Requires Flexibility

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The very wealthy often expect their family fortune to last for generations. The challenge these days, when the pace of change seems to be ramping up, is getting them to plan that far ahead. Financial advisers and estate-planning professionals say many of their clients feel uncertain about the kind of world their heirs will inhabit, what with advances in technology, political and economic upheaval and even fast-evolving views of what constitutes a family.

These concerns are making it hard to steer estate-planning conversations beyond simply the next generation to thinking many decades, or even centuries, down the line, advisers say. A contributing factor is the large number of newly wealthy clients.

Some people, especially the first generation to have wealth, do have concerns about the future and they aren’t used to thinking in multigenerational terms, says Matthew Brady, a San Francisco-based senior director of wealth planning for Wells Fargo Private Bank, which manages $205 billion in assets. Mr. Brady cites as an example a recent meeting he had with a couple in their 60s who started a successful business that they plan to hand over to a son. They were reluctant to think beyond that event.

It takes time for some first-generation millionaires and billionaires to adjust, he says, first to being comfortable with managing the wealth, then thinking about transferring it to their kids, and then contemplating future generations and the family’s lasting legacy. Add in uncertainty about what the family will look like, and what kind of tax rules and other financial issues they will face, and that adjustment gets all the harder. It can make recommending some strategies--for example, irrevocably handing assets over to a dynasty trust set up to last for decades and decades--very tricky.

Those concerns can be addressed by emphasizing flexibility and employing a variety of estate-planning techniques to make sure that a multigenerational trust--and a family’s financial legacy--isn’t too rigid, advisers say.

We’re increasingly seeing trust documents where multiple means for increasing flexibility are built into a single document, says Suzanne Shier, a Chicago-based chief tax strategist at Northern Trust Wealth Management, which manages $233.1 billion. For example, trust documents--including those for a dynasty trust--can designate individuals to be trust protectors with the power to modify an otherwise irrevocable trust, says Ms. Shier.

Another practice that is gaining favor is known as decanting, which involves moving assets from an old trust to a new trust. “Decanting is a direct response to the inflexibility of trusts in the past,” says Catherine Schnaubelt, a senior wealth strategist for Atlantic Trust’s Houston office. Atlantic Trust oversees $27 billion. Decanting assets can only be done in certain circumstances, and states have varying laws regarding the technique.

When approved, however, assets from the old trust can be poured into a new trust that might have less stringent, or more stringent, restrictions about who can be the trustee and how distributions will be administered, Ms. Schnaubelt says. This can account for a change in family circumstance down the road, such as a beneficiary who needs expensive medical care.

Another move that can be made to increase flexibility when setting up a multigenerational trust is giving broad discretionary powers to trustees, and giving beneficiaries powers of appointment, says James Kronenberg, chief fiduciary counsel at Bessemer Trust, a New York firm that oversees $105 billion.

Powers of appointment allow for a beneficiary to direct what happens to the assets for the next generation upon that beneficiary’s death, he says. This can be useful if there is an unforeseen development with a future generation, like a grandchild, for instance, with a substance-abuse problem.

For clients that are still hesitant to commit too much to an irrevocable trust, Atlantic Trust’s Ms. Schnaubelt mentions another option: Using a family limited partnership or family limited liability company in conjunction with a trust. This allows for the minimization of taxes and transfer of assets between generations, while still retaining some added flexibility.

Click here to access the full article on The Wall Street Journal. 

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