Multigenerational Trust Planning—What’s Different from Other Trust Planning?

Given the current political uncertainty around estate taxes, many advisors (appropriately so) are encouraging clients to consider making large transfers into irrevocable trusts. Today every individual can transfer $11.7M into an irrevocable trust without paying a gift or estate tax. This is especially beneficial with an appreciating asset as not only the original value of the asset, but all the appreciation is then out of the reach of estate taxes into the future. The assets continue to be held “forever” for the benefit of, typically, the Grantor’s lineal descendants. This window of opportunity is most certainly closing given activities in Washington D.C. 

These irrevocable trusts are frequently called Dynasty Trusts and can be a favorable shareholder transition method for family businesses in situations where fewer family members are working in the business, but where the traditional exit strategies – such as selling the family business or buying out family members not working in the company – are not consistent with the family’s mission, vision and values. For example, family members may want to stay connected to the family legacy as a shareholder and continue to receive an economic benefit from the company (e.g., dividends), but not want to be involved in the day-to-day operations of the family business. In addition, transferring some ownership of the family business to a Dynasty Trust reduces redemption pressure on the family business at the death of a shareholder that owes estate taxes related to the family business as an illiquid asset.

Family business owners should be considering questions regarding the ownership of the family business that may ‘point to’ creating a Dynasty Trust. Some starting point questions may be:

• Is there a potential for ownership in your family business to be fragmented in the future so no one person or small group is in control to make shareholder decisions?  
• Is the future ownership of your family business clearly defined? How will shares pass through future generations in various family branches?
• If you unexpectedly died, would your business have to be sold to pay estate taxes?
• Have you projected the value of shareholder ownership into the future based on current growth?
• Have you thought about the legacy and support you want to provide for your grandchildren?

When doing multigenerational planning and drafting trusts that go on in perpetuity (that’s a long time!), a deeper consideration of standard trust provisions, providing a method in the trust for input from a beneficiary and determining trustee options are all important.  Even definitions that seem “standard” like lineal descendant deserve a closer look when contemplating medical technology and its advancements over time.  To address this, and other challenges, building some flexibility into trust documents to handle unforeseen circumstances can prevent family disharmony and potential litigation in the future.  In addition to planning for unforeseen circumstances, another concern with long term planning is many beneficiaries exclaim they “hate” being a beneficiary of a trust.  When digging deeper, the disdain frequently revolves around the beneficiary feeling they have no ‘say’ in decisions related to the trust.  Essentially, they don’t feel treated as an adult by the trustee even long after reaching the age of majority.  The “mother may I have a penny” syndrome! So, in addition to building in flexibility to address unknown issues of the future, when doing long term trust planning its important to consider creating a “voice” for a beneficiary with built-in checks and balances to alleviate some of these beneficiary concerns.  Finally, thinking through trustee options for the future may be challenging. Grantors frequently have family members or trusted advisors they have confidence in serving now as trustee but establishing a process for selecting trustees over time for a long term trust can stymie a Grantor. For families doing multigenerational planning, an Ohio family trust company may be the solution to solve this quandary since as an entity it goes on in perpetuity!

Right now, this irrevocable planning can be viewed as truly legacy planning necessitating the creation of entities and structures that ideally are designed to keep a family together across generations. Taking the time to contemplate family values and incorporate these values as the family’s vision for the future can also help avoid probate litigation in the future. 

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^{Disclosures: The information provided is general in nature, is provided for informational purposes only, and should not be construed as financial or legal advice. The views expressed by the author are based upon the data available at the time the article was written. Any such views are subject to change at any time. Clearstead disclaims any liability for any direct or incidental loss incurred by applying any of the information in this article. All financial decisions must be evaluated as to whether it is consistent with your objectives and financial situation. You should consult with a financial, tax, or legal professional before making any decisions.}