The Pool Boy and Other Trust Planning Pitfalls

George Bernard Shaw said “Marriage is an alliance entered into by a man who can’t sleep with the window shut and a woman who can’t sleep with the window open.” Like marriage, estate planning takes work… optimism, contingency planning, and adjusting.

I want to share some of the pitfalls I’ve experienced so that you avoid a head-on collision on your life journeys. They’re talking points with your family, business partners, tax experts, lawyers and financial advisors. And please think about estate planning as planning to live (not death) and preparing your heirs for your estate (not vice versa).

My #2 kid is trustee… I don’t get along with the others – Trustee holds an important position wearing many hats and has a fiduciary standard of care. Duties include accounting, compliance, loyalty to beneficiaries, impartiality, and be prudent. Trustees may be able to hire professionals to help. However, the buck ultimately stops with the trustee. Name the ‘right’ trustees to make those King Solomon decisions and see your well-intentioned plans become reality.

Avoiding Arguments, and Worse – A sensational estate war ensued and the feud over Jerry Garcia’s estate kept truckin’ with arguments over guitars, Cherry Garcia ice cream, and ties. Sometimes there’s unrest when laid to rest. It could be from dysfunction families, unequal ownership of family businesses, or multiple marriages. And fraud and scammers persist. Trust litigation is on the rise, and so should risk management. Several approaches include prenuptial agreements, titling of assets, documenting intentions, and independent trustees.

‘Shirtsleeves to Shirtsleeves’ – History is rich with stories of family wealth that vanishes – entrepreneurs who accumulate vast sums of wealth that lasts one or two generations before being exhausted by the third. Most people think the greatest risks are from external factors – investment, market, financial and economic problems. In reality, poor family communication and relationships, educating the next generation, and governance issues trump. Your wealth is your values, as well as your valuables. Your family’s key assets are the individuals in your family. Preserving your unique family values and history better protects and sustains. Are these discussions part of your family meetings?

Distributions and Investments – A common situation in family trusts involves husband dies, spouse survives and entitled to trust income and principal for “health and welfare,” and subsequently, assets pass to the kids. Normally there are spendthrift provisions for the spouse (help curb caviar wishes and champagne dreams, and the pool boy) and assets might remain in trust for the kids until they reach some specified age of ‘responsibility.’ Several conflicts arise: (1) spouse wants maximum income, kids want growth; (2) what is a ‘reasonable’ lifestyle; (3) how ‘income’ is defined (includes capital gains?); (4) interest rates are low (such as now); and (5) fuzzy crystal balls – conditional wealth transfers (e.g. will the trust fund my ‘education’ if I go to trade school rather than an Ivy League college?). Trustee must manage for all beneficiaries, including the remainderman. And trends towards ‘total return’ investing continue.

Take action. Plan for the future.

About Brian Loy

Brian Loy writes insightful and inspiring articles about the ever-changing world of personal finance and the global trends that affect the risk and return on investments and shape the financial- and retirement-planning process.
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