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.
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