Wisdom in Wealth

Strategies, Stories, and Lessons Learned Over the Course of 25 Years Helping Families Plan Their Financial Lives

Expectations & Structure Lead to Better Results

By Bill Beynon | September 18, 2020
Reality vs. Expectations

In recent months, there has been much discussion around the election and potential changes to Estate, Gift and Income tax law. In recent Wisdom and Wealth editions, (Looking for Opportunity in Change, It’s Not About the Tax, It’s About Liquidity, Innovation in Change) I have outlined potential options for securing the current Unified Credit, as well as new creative trust designs that may benefit you as you engage in the planning process.

“Expectation is the root of all heartache.” - William Shakespeare

Another common issue we encounter in family planning occurs when families provide money and trusts for children, or give money directly to children while the parents are still alive.

It is often very difficult for parents to watch their children handle the money in a way that they do not necessarily prefer, or deem as “responsible spending.”

Our advice to families in that situation is to be very clear and upfront about their expectations for the family’s money, while they are still alive. If they do not set clear standards and expectations, they will be setting themselves up for disappointment. We have had situations where families provided trusts through planning to their children, yet, as expected, they are constantly unhappy and regretful because they see their children excessively and mindlessly spending all of the money that they worked hard to provide for them. The issues, typically, are not about the tax advantages gained by making the gifts. Rather, it is usually the spending and lifestyle exhibited by the beneficiaries. The ability to over-spend is enabled by loosely structured trusts or direct, unrestricted gifts.

What we have found is that unless parents have the conversation about expectations upfront with the children, it becomes corrective rather than proactive. Trying to correct a behavior after the fact, tends to be more difficult than it would have been if it had been addressed upfront. Typically, children will listen to their parents’ wishes so long as they are clear about it at the beginning. This notion is true, beyond financial aspects. Before you are ready to make a substantial gift to your children, we ask clients to ask themselves, “What are my children’s tendencies? What are their lifestyles? Should we structure something more restrictive upfront? Should we have a conversation about the expectations so there’s clarity?” We have found that by coaching families through these conversations, the end result is far more favorable when open conversation occurs on the front side.

These structures and conversations necessitate a fine line. There are degrees of control in which you are too strict with your expectations. We must remind our clients to not be restrictive to the point of putting their family members in a box. We have seen many situations where families had trusts that were created many years ago, that required a bank to be the trustee. This is an outdated method for creating trusts. There are many more effective options for families to employ nowadays. In some severe circumstances, we have had situations where the beneficiaries did not have the ability to change that trustee, even when justified, which of course - caused many headaches along the way.

Institutions change and merge over time, but the control still resides in the new corporate entity. The people also change. Over time, the people managing the trusts may have no connection to the original family members that created the trust. They are required to follow the corporate process and rules that may result in a lack of flexibility. There are no real checks and balances if you give ultimate power to a trustee, without the ability for the beneficiaries to replace that person or institution if and when that becomes necessary. You could be creating a situation where that trustee has unchecked control of the trust and its assets. I am not suggesting that all banks/corporate trustees are bad. There are many fine institutions that do a great job. The point is to always have a check and balance in your plan. In many circumstances, the trusts you create today will live on for many generations. As time passes the lives of your beneficiaries, and the world around them, will evolve tremendously. It is important that the plan can adapt to those changes and needs.

The general approach we take is to get clients to set a standard for what the trustee’s qualifications will be. We like to have our clients clearly identify the standards and qualifications that a trustee must meet. We certainly do not recommend that they give their heirs the right to fire the trustee haphazardly. We advise them to specify circumstances in which they can replace the trustee with someone else who meets the standards they created. That way, the client is protected, but their beneficiaries are not left in a financial bind later.

Historically, many families have used a bundled approach. For instance, they would leave ABC Bank as the trustee and ABC Bank would also manage the assets in the trust. That might seem fine on the surface, but if the family is dissatisfied with either the asset management or trust administration, the only option is to change the whole relationship. The issue is the lack of flexibility, resulting in the family having to go through the entire process all over again. Many families also feel more comfortable bifurcating the asset management and trust administration to prevent any conflicts of interest.

The current trend is the use of Directed Trust Services. Directed Trustee arrangements allow for the bifurcation of the asset management from the trust management. With this structure, there is flexibility to replace either the asset manager or the trustee. In a bundled approach, it is all in or all out. There are several trust companies that offer Directed Trustee arrangements.

In addition to that structure, many states have enacted what we refer to as Family Trust Powers. The Trust Powers give families the ability to create their own trust company in specific states, including Florida, Ohio, Delaware and Tennessee. This gives a family the ability to build a trust company instrument, that is owned by the family, to control the family assets.

Many times, families name an individual, such as their CPA or attorney as the trustee. Over time, the people in the trustee role may change and it causes a potential challenge for the family. In this type of arrangement, every time there is a change, a CPA retires or changes firms, it is likely that the estate documents will need to be changed. Changing documents can be costly and time consuming.

As an example, it may be beneficial to have the ability to name the “Smith Family Trust Company” as the trustee for “Bob Smith”. The family trust company enables the family to put outside advisors, financial advisors, lawyers and CPAs on the board and committees of the trust company along with family members in order to have scale and control. This also helps to keep those family assets under the control of the family…even though they are in a third-party environment from a trust perspective.

The Family Trust Company can be a great option (see below). A more detailed illustration can be viewed here.

Family Trust Company, LLC - Sample Structure

Family Trust Company, LLC - How it Works_72

In summary, expectations and structure play a paramount role in your planning. As you embark on your planning process, consider locking in your Unified Credit before any law changes occur. Engage your advisors and communicate with your family. Discuss openly your expectations and keep an open mind to new structures and services.

Lastly, if you would like to discuss your situation, click here to schedule an appointment.

CWA Asset Management Group, LLC is an SEC-registered investment adviser, doing business as Capital Wealth Advisors and as blueharbor wealth advisors. CWA’s ADV 2A can be accessed via https://adviserinfo.sec.gov/. This material is as of the date indicated, is not complete, and is subject to change. Any opinions expressed herein represent current opinions only and no representation is made with respect to the accuracy, completeness or timeliness of information and CWA assumes no obligation to update or revise such information. Additional information is available upon request. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, has not been independently verified and CWA is not responsible for third-party errors. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Nothing herein should be interpreted as investment advice. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Specific companies or securities described in this report are meant to be illustrative of investment style. Such case studies are not meant to be, and may not be, representative of any portfolio or holdings of CWA Asset Management Group, LLC. CWA does not guarantee the accuracy of information of any third-party website denoted in this article. Third-party website is provided for informational purposes only.

Please note that past performance is not indicative of future results.

This material is solely for informational purposes and is intended only for the named recipient. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
William Beynon
President & CEO

Co-Author of Wisdom in Wealth.

John Walker
Executive Vice President | Private Wealth Management

Co-Author of Wisdom in Wealth.

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