November 2nd, 2023

To trust or not to trust? That is the question!

It is common to use a family trust or other trust structures to allow assets to pass to the next generation in a measured way. But is this always the best strategy to pursue? We believe it’s critical to consider all the relationships, and the operational (among other) implications that come with establishing a trust.

Trusts are typically used to accomplish certain goals when leaving an estate to your spouse, children, or any other named beneficiary. To be effective, it’s important to consider not only the quantitative goals (financial protection, preservation of capital for the long term, and tax optimizations), but also the qualitative outcomes (relationship dynamics, lifestyle, and ultimately the overall impact) of using a trust. Ideally, it is better to avoid the transfer of wealth being viewed as just business and/or a tax transaction.

Author and retired attorney, Jay Hughes describes this well: “This trust is a gift of love. It exists to enhance the lives of the beneficiaries.” And here, he is not referring to materialism or handouts that allow for an expensive lifestyle. He is referring to some levels of preparation, education, core values, maturity and self-sufficiency. The trust should have meaning and emotions attached to it, so the next generation is prepared to receive it with grace and not abuse it.

What is a trust?

A trust is a legal agreement between the named trustees and beneficiaries. The agreement will outline the management, administration, and distribution expectations of the trust. The trustee has the discretion and obligation to follow the terms of the agreement. The beneficiary carries the accountability for the use of the distributions.

Here are three questions that can indicate whether a trust will make sense for your situation and family, and what its ultimate structure might look like:

  1. What is the main purpose or reason for using a trust?
  2. What is the most important outcome that you would like to see as a result of a trust being in place?
  3. Who will you select to take on the role of the trustee?

A trust establishes a mid to long term relationship between the trustee(s) and the beneficiaries. A beneficiary is dependent upon the capabilities, expertise, and knowledge of the trustee to manage the affairs of the trust over many years. This makes the selection of the right trustee a crucial one.

Selecting your beneficiaries is usually the easy part because they are typically your spouse and/or your children. Selecting a trustee is more difficult because you have choices about who it will be, and whoever you choose will have a solemn responsibility to carry out your intentions and make decisions that will impact the lives of your beneficiaries.

Your trustee may be a family member (sibling, aunt, uncle, child but caution is warranted here), a professional (a lawyer, accountant, manager), or a private trust company. It is imperative to have an inclusive selection process so all parties named within the trust have a clear understanding of the trust’s intentions, its management, and distribution expectations, and as such, they can start to work on the relationships that will continue beyond your lifetime.

In conclusion, before you decide to use a trust for estate and tax planning, consider the qualitative outcomes and relationship dynamics that will result. Ensure that family members and other parties involved in the trust comprehend the implications and expectations ahead of time so that when the trust is created, there is a seamless transition.

For a personal discussion about the use of trusts and whether they can assist you in meeting your goals, please contact us so you can speak with a Cumberland Portfolio Manager.