Stuck in a Trust

Written by Lisa Brown, CFP®, CIMA® on January 1, 2016

When you have significant assets that you desire to protect and pass down to the next generation, a trust is often a tool used to accomplish this goal. Placing assets in a trust can help reduce estate taxes, avoid probate, provide for management of the assets if the grantor or beneficiary becomes disabled and can help keep assets in the family for many generations. Trusts can also protect the beneficiaries both from themselves (i.e., a young person getting their hands on too much money, all at once) and from their creditors, ex-spouses, etc. Estate attorneys can tailor trust documents to accomplish most or all of your personal goals for how you’d like your particular assets handled both now and in the future, and they can also include language in the trust document to allow for a reasonable amount of flexibility. Having some flexibility is important to help maximize both your personal enjoyment of these assets during life and also your intended beneficiaries’ use of the funds.

One example of flexibility that has been receiving an increasing amount of attention over the past few years is the bifurcation of trusts. This is essentially allowing the administration of the trust (i.e., making payments to beneficiaries, collecting trust income, filing the fiduciary tax return and general trust accounting) to be handled by one group of professionals whereas the investment management (implementing, monitoring and adjusting the proper mix of stocks, bonds, alternatives and cash) is handled by another group of professionals, often at a separate investment management firm. The investment manager can often serve as the local point of contact for the family and coordinate with the administrative trustee on behalf of the family. They’ll often develop the multi-generational wealth strategy for the family, which can help ensure the investment strategy is coordinated with the estate plan, risk management strategy and family’s cash flow needs.

Having trust assets administered and invested by the same company might seem convenient, but it does not guarantee enhanced or expedited service. The company that may be the best at administering trusts may not have the most competitive investment platform or group of investment professionals to oversee the growth and income needs of the portfolio for its beneficiaries. With all of the change and consolidation in the financial services industry these past few years, for some it has become quite apparent that the group entrusted to administer and/or invest a family’s trust may not be the right solution for tomorrow or even the next generation. The people change, the firm changes/merges and the administrative and investment processes and procedures morph over time. Keep in mind that what is right for today may not be the best solution for the next 10, 20, or even 50 years. As such, with a more flexible trust document beneficiaries can be given the freedom to hire and fire investment managers, remove a trustee and designate a successor, and avoid becoming trapped in their trust.

To determine whether a bifurcated trust relationship would be beneficial to your family’s situation, consider whether having the trust assets coordinated with your or your beneficiary’s personal assets and wealth strategy is important, whether your family prefers to have relationships with different groups of specialists, the geographic location of beneficiaries and their advisors, etc. If a bifurcated structure is something that you could benefit from, work with your estate attorney to include certain language in your trust document to allow for separation of these responsibilities, which includes selecting a state the trust would be located in that recognizes the bifurcated structure. Even if you have a Trust in place today, speak with your attorney to determine how your Trust would treat this division, if it’s possible, and whether any changes can be made to the Trust document to address this provision. If you are dissatisfied with your Trust provider, it doesn’t necessarily mean you are stuck with that relationship. Review the Trust document with your attorney and understand your options to select the groups of financial professionals who will work in your best interest and have the expertise, service level and efficiency you deserve.

Implementing and funding a Trust can require time, effort and financial investment, which could have many positive outcomes for both this generation and the next. As such, careful planning and forward thinking may enhance your and your beneficiary’s experience and control, rather than feeling stuck and succumbing to someone else’s decisions for your money.