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Family Wealth Transfer Part III: Planning For Controlled Distributions


Families usually find it awkward to talk about money but rich families seem to be even worse at broaching the matter. In fact, a startling 90% of wealthy parents don’t tell their kids about family finances at all[1].

Failing to have ‘the conversation’ with your children can make for a rough journey if you’re bent on creating a sound financial plan. If you’ve kept up with this series of articles, you know the importance of discussing wealth transfer and inheritance protection with your children. Lack of communication can cause all sorts of misunderstandings and disputes further down the line. That’s why most financial advisors will advise their wealthy clients to talk to their kids about money.

What if ‘The Talk’ is Out of the Question?

As we all know, knowing and doing are two different things. Most families know it’s vital to prepare the next generation for handling wealth but that doesn’t make it any easier when it comes to actually initiating ‘The Talk’.

If you’ve decided that this type of discussion isn’t likely to be productive, don’t despair. Similarly, if you’ve initiated the process and stopped because of what is revealed or the anxiety it caused you, there is something you can do. Finally, some families have to come to terms with their concerns about their child’s future spouse and discovered that a premarital agreement is not an option.

In all three of these scenarios, where the planning process is foiled, there is another option families can choose. Having failed to project the planning process outward, don’t despair as you still have the opportunity to turn the planning process inward.

A Traditional Planning Process

What does an ‘inward’ planning process look like? To answer that, we have only to look back in time to how wealth has been managed traditionally.

Your assets belong to you, and thanks to ever more generous State Trust Laws, your ability to control those assets, even beyond your own death, continues to expand. If speaking with your children about their inheritance is the ‘new’ way to manage wealth transfer, restrictive Trusts are definitely the ‘old’ way to address these concerns.

The old and the new ways of managing family wealth don’t have to be mutually exclusive. But let’s assume you have received no satisfaction from planning with your children—here’s how you can plan for them without their input.

Controlled Distributions 101

The basic tool for distributions to your children will be a Trust. There are four types of Trusts:

  1. Testamentary Trusts. These are created at your death by your Last Will in probate.
  2. Revocable or Grantor Trusts. These can be modified during your life
  3. Irrevocable Trusts. These are completed gifts when they are created before your death and, to a great extent, are beyond your control.
  4. Specific Trusts. This vehicle is beyond the scope of this article, but the distribution provisions discussed here could be implemented in any of the three Trust forms.

You may be wondering about tax implications. As we focus on the distribution of assets to our lineal descendants, keep in mind that there are income and federal estate tax implications to these transfers. You most likely would be pleasantly surprised by the tax planning opportunities, even within Trusts, but let’s set those concerns aside for this discussion.  Our concern is how do we control distributions for your family, and we are not going to let the tax “tail” wag the estate planning “dog”.

Trusts are Flexible, Bending to Your Needs and Desires

A trust could be as liberal as to distribute all of a child’s inheritance to them at your death in a lump sum. Alternatively, you can create a trust that never distributes the principal to a child at all, only letting them have an income stream during their lives, with the principal of the account being paid to their children, or subsequent generations.

Such a restrictive trust would be called a Dynasty Trust as it used by the very wealthy and creates a lasting dynasty for the family. The rule against perpetuities has long limited the duration of these trusts, but little by little states are allowing longer lifespans for Trusts to operate.  Some states allowing Trusts to exist for even 1,000 years.

Regardless of what steps or what States you would have to visit to accomplish your goals, the point is that as the owner of the assets you can be in control of the asset distribution today and tomorrow.

Protections From Third-Party Intrusions

Spendthrift provisions in a Trust prevent third parties from reaching the corpus of the trust that is intended or available for a beneficiary. These provisions usually remain in place until such time as the beneficiary has an unrestricted right to the distribution.

This can protect a beneficiary’s inheritance from creditors, including a spouse who refused to sign a premarital agreement, as long as the assets are held in Trust. The more discretion the Trustee has to withhold distribution, the more protection afforded from the beneficiary’s creditors.

However, these limits are constantly being tested by Divorce Courts around the Country, and even where the Divorce Court cannot reach the beneficiary’s inheritance in Trust, they can allocate the beneficiary’s own marital assets more generous to the other spouse to compensate for what the Trust beneficiary “will” receive in the future from his or her parents.

Ideally, a parent concerned about this issue would have both a Pre-marital agreement for their beneficiary child and a spendthrift trust for their child, but the spendthrift trust is a critical backstop where the premarital agreement does not exist.

Trusts and the Possibilities for Incentives Built In

Your ability to control distributions goes beyond just withholding income and/or principal. Trusts can be drafted to incentivize certain activities.  There are many examples of incentives.

  • You could craft distributions that reward people for good grades, keeping health habits, or any other criteria you can imagine.
  • You could reward lazy beneficiaries by matching their earned income with a multiple distribution of income and/or principal from the Trust.
  • You could incentivize the purchase of a home or creation of a business by authorizing the loan or distribution of funds for these purposes.

Your imagination is the limit, but I would caution you to focus on things that are easily measurable by a third party Trustee. Your trustee can very easily request grade transcripts, but they can’t follow your beneficiary around twenty-four hours a day to make sure they exercise.

Disincentives are Possible, Too

Just as you can incentivize, you can disincentives behavior as well. Many people like to threaten termination of benefits if the beneficiary uses tobacco products.   Again, just like exercising, smoking is impossible to monitor on a 24-hour basis.  Quarterly or annual blood tests may allow the beneficiary to both violate the terms of the Trust and received their distributions, which might be self-defeating for all parties.  However, being subject to random testing may keep the issue on top of mind for the beneficiary and that may be a “win” that the Parent would be happy to attain.

Here’s the point: craft your Trust with ascertainable measurements and reasonable enforcement mechanism to achieve your goals. Also, be advised that any provision that restricts someone being married is typically void in most jurisdictions.

Authorizing Distributions: HEMS

A very common standard for authorizing distributions is called HEMS, meaning Health, Education, Maintenance and Support. This standard is considered ascertainable by the IRS and generally is defined in providing for these needs in the same manner the person was provided for during the lifetime of the Trust’s creator.

Again, the Trustee would be the arbitrator of these issues, subject to judicial review for abuse of their discretion. Because a Trustee’s discretion can be a point of conflict for family members who are beneficiaries, you may want to consider the use of a professional third party Trustee to remove the emotional component from these judgments.

Benefit from the Many Tools Available Today

If you discussed wealth transfer with your family you may have a feel for how restrictive your trust needs to be to accomplish your goals. If you were unable to have such a family discussion you can use careful drafting to craft a document that allows your Trustee to carry on your judgment when you become incapacitated or die.

The legal tools to help you achieve your goals are numerous, and growing in power, so if controlling distribution is part of your estate planning strategy, you live in very fruitful times.

Scannell Wealth Management is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.

HighTower Advisors LLC, its affiliates and HighTower Advisor’s Financial Advisors do not provide tax or legal advice. You need to consult your legal and tax professional when making any investment.

[1] Bloom, Ester. The Unexpected Reasons 90% of Wealthy Parents don’t Tell Their Kids What They’ll Inherit. Retrieved 11/14/2017 from https://www.cnbc.com/amp/2017/06/26/90-percent-of-wealthy-parents-dont-tell-their-kids-what-theyll-inherit.html


Scannell Wealth Management is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

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This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.