“Self-worth is very different from net worth,” says Michael Bailes, a trust officer for U.S. Bank Private Wealth Management. “Net worth that is predominantly generated by an individual takes on a very different meaning than inherited wealth.”
Few young people with inherited wealth truly understand the journey that led to their good fortune, Bailes explains. If you’re preparing to leave wealth to your descendants, you may fear your gift will leave them with an inflated net worth but diminished self-worth.
A trust can help protect your family and money.If set up properly, a trust allows you to define distribution and use of funds rather than simply leaving an inheritance.
Here are eight ways a trust fund has the potential to help create long-term financial stability for your heirs.
You can influence certain behaviors for your heirs at each stage in their life, such as basing trust distributions on school performance or success. This can be a powerful tool for helping to establish productive traits early in adult life.
“Let’s say John is attending college,” Bailes says. “If he achieves a 3.0 grade point average, he receives a certain amount of money from the trust for living expenses. But if that GPA is not achieved, a lesser amount is distributed.”
This motivational tool is similar to an employer matching contributions in benefit plans to boost employee savings. “The trust could state that your grandchild will receive a principal distribution up to 50 percent of their adjusted gross income for the previous year to be distributed in quarterly installments,” Bailes says. “This encourages them to earn a living.”
Additionally, language can be crafted in an estate plan that would allow a beneficiary to live more comfortably when choosing a career in public service.
Similar to making distributions based on a beneficiary’s salary, a trust can be a priceless source of education: You can attribute a matching contribution to a beneficiary’s college savings plan.
If you’d like to get your beneficiaries interested in charitable work, a trust can include language that incentivizes philanthropy. “You can make gift-giving a prerequisite for any future distributions or make board participation a necessity,” Bailes says.
To encourage family bonds, a trust can be granted the power to distribute funds for a family reunion every few years to help solidify the extended family.
You can state in the trust document that no distributions will be made if the beneficiary engages in behaviors you want to discourage. For instance, you could take away distributions for taking illegal drugs or being convicted of a felony in the last 12 months.
Age-based distribution provisions are fairly common in trusts. For example, it could specify that a beneficiary should receive one-third of the trust at 25, one-half at 30 and the rest at 35.
“It might make sense to have principal discretionary provisions available to the beneficiary during younger years for certain purposes. However, distributions of large sums of money may result in a more advantageous outcome when reserved for a more mature, established adult,” Bailes says.
You may be considering tying distributions to achievements or life stages: graduating from college, buying one’s first home, getting married, having children.
However, Bailes cautions that without careful controls, this strategy might not have the desired effect. “You wouldn't want a beneficiary to get married or have a child solely because they would receive $100,000 by doing so,” he says.
“These ideas help you think about how you might achieve your desired effect when drafting a trust document,” Bailes says. “It’s particularly important that you communicate your wishes clearly to the estate planning attorney and the future trustee.
“Because this strategy can put additional pressures on a future trustee in executing the plan, it’s important that as much information is communicated as possible to avoid any confusion.”