Bequeathing Your Values

More commonly, though, a trust ends at a particular date, and the heir gets unrestricted access to the money. That structure can be a good way to protect young heirs from the potential consequences of youthful judgment while still letting them enjoy their inheritance fully when they’re old enough to use it well. “The kid’s judgment at 21 might not be the best, and they might put a Ferrari in the garage instead of deferring it until they’ve had more experience in life,” Meyers says. If they get limited use of the money when they’re young but free access when they’re 35, on the other hand, they’re more likely to use the money wisely.

Although trusts can be a great way to protect money, experts stress that it’s important to keep them flexible. In trusts that go on for many years, Clark recalls instances of overly restrictive investment or income distribution parameters that well-meaning grantors drafted into provisions long ago. For example, many trusts historically restricted income beneficiaries solely to the yield generated by investments held in the account. As bond and stock yields declined dramatically over the past two decades, income beneficiaries have seen their payments shrink even as inflation has whittled away their purchasing power. Today, a more common method is to set a realistic distribution percentage based on the value of the total account.

It’s not always possible to predict how people and their circumstances will change, either. “You write these things with all these stipulations, and something you didn’t anticipate creates a scenario that really doesn’t work,” says Kevin Lanigan, president of Edina-based Carlson Estate Planning. You might specify that a child has to stay in college in order to receive money—but what if that child becomes seriously ill and takes time off for treatment? Or you state that you will match any income earned by the child, but fail to consider that the child might be a full-time, stay-at-home parent.

Some parents allow responsible children to inherit outright, but set up trusts for kids they think won’t handle the money well. Such a decision can cause friction among siblings. “I’ve had a case where the mother distributed outright to her oldest son, but the youngest son got his in trust for a very long time. He had had financial difficulties. The older son was very financially successful, but the younger one was not. It was really quite a shock to the younger son,” Meyers says.

Trusts can also be costly to administer. “Trustee services, typically through a bank, can be expensive,” Stiles says. The cost might be 1 percent or 2 percent a year, though this figure can vary. “It’s to your benefit to do a cost analysis,” she adds. The taxes a trust pays are also typically higher than those an individual pays on earnings. “When you set up a trust, yes, you control your money from the grave, but it’s not practical for everyone,” Stiles says.

Out in the Open

Whatever estate plan you choose, consider talking with your family about your decision. The conversation may not be an easy one, Clark says. “You’re talking about the two worst inevitabilities in the world—death and taxes—in the same conversation,” she says. However difficult, the conversation can help heirs understand your thinking, give them a chance to express their views, and ultimately reconcile themselves to your plans.