Distributing the Inheritance: It's a Matter of Trust

Lynn Brenner | Family Finance

November 15, 2003

Estate planning is a fairly straightforward business if your heirs are all mature, financially sophisticated adults who can take care of themselves after you're gone.

If that's your situation, congratulations - you can skip this column.

But keep reading if you fear your loved ones may be too financially inexperienced for their own good. Are your kids and/or spouse too impulsive, too cautious, too easily swayed by a slick sales pitch to use their inheritance wisely? Then you can protect them by leaving their inheritance in a trust.

You're the one who decides how long the trust will last. For example, you might want your 18-year-old daughter to receive half her trust assets at age 30, and the balance at age 35. Meanwhile, the trust would pay her a generous annual income. And you could make her the co-trustee after age 21. That would give her an opportunity to gain experience handling her money. (You also could require that the senior co-trustee sign off on all major decisions.)

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The big question, of course, is whom to name as that senior trustee. You need someone who will carry out your instructions - but no legal document can anticipate every future event. That's why it's advisable to give your trustee some discretionary power to respond to the beneficiaries' needs, says lawyer John Barnosky, a partner at Farrell Fritz in Uniondale.

What if the financial markets tank, shrinking the trust's annual earnings to less than your surviving spouse needs to live on?

What if in five years your child wants capital to create her own business?

What if your first grandchild requires medical care not covered by his parents' health insurance policy?

In any of these cases you'd want to be sure that your trustee had the authority to adjust the annual income payments and even invade the trust principal if necessary.

In other words, you need a trustee on whom you can rely to make decisions for your family as you would if you still were alive. It's essential that he or she understand your family and your values. Administrative and investment expertise are important, too, but a trustee always can hire professionals to supply those skills, Barnosky points out, adding: "You need a trustee who will carry out your intentions - and who will be strong enough to say 'no' to unreasonable demands from your beneficiaries."

Your trustee may have to weigh conflicting needs among your survivors if your trust serves a dual purpose. For example, your trust may provide income to your surviving spouse (the "income beneficiary") with the assets going to your kids (quaintly known as the "remaindermen") after your spouse's death.

In a first-marriage situation, says Barnosky, you may be comfortable giving your trustee the power to make distributions to your surviving spouse for any reason the trustee deems appropriate, knowing that ultimately your surviving spouse's money will go to your kids.

It's a different story in a second- or third-marriage situation. There's inherent tension in a trust whose income beneficiary and remainderman are not related. Let's say you want to provide income to your second spouse, but want the principal to go to the kids of your first marriage. The more generous the distributions to the surviving spouse, the less will be left for the kids. In this case, says Barnosky, "You might want to give the trustee power to invade the principal for the income beneficiary only in an emergency. You want your trustee to understand that it's all right to invade the principal to pay for your surviving spouse's chemo treatments, but not for a luxury cruise."

Who can handle all this? Friends and family members are the obvious candidates for this job. Make sure they're willing to serve. Remember, too, that your trustee should be the right age to survive for the duration of the trust.

Depending on how much money is involved, you also may want to consider naming a corporation as co-trustee. (Most banks have a $1-million minimum.) A corporation is an institution that's likely to be around for generations and often it has experienced trust professionals onboard. But banks merge with other institutions. Their trust officers change. Their investment performance may not pan out as well as you hoped.

For all these reasons, it's a good idea to give your personal trustee, and/or your trust beneficiaries, the power to replace the corporate trustee if necessary.

To read previous installments of this column, visit www.newsday.com/act2