Quick question: What do 1931, 1933, 1934 and 2012 have in common?
Answer: they’re all trust “vintage years.” In those years, grantors rushed to create trusts before anticipated tax increases.
Today, once again, in the face of ballooning deficits and national debt, as well as widespread protests over inequality, many wealthy families feel that estate taxes have nowhere to go but up. Trusts and estates lawyers are working around the clock. The 2020 vintage is upon us.
We can’t know the future of estate tax legislation. But our experience over a century of combined practice has taught us one thing: vintage-year trusts can have long-term negative impacts on the families who create them.
The reason is simple: it comes down to intention. A grantor who rushes to create a trust is likely focused solely on tax minimization. This isn’t a bad thing—but it can cast a long shadow. In the long run, tax minimization proves secondary to the true effect that the trust will have over the ensuing years, decades, even century: the effect it has on its beneficiaries.
We’ve known entire families of beneficiaries of 1931, 1933, 1934 and later trusts. When we speak with those beneficiaries alone—separate from well-meaning trustees or advisors—and we ask them whether their trusts have proven a burden or a blessing in their lives, well over half of them admit, “A burden.”
The reasons for this perhaps surprising answer are, again, simple:
- Such trusts often have no expression of the grantor’s purpose, leading beneficiaries to conclude that the benefit bestowed was quite beside the point.
- Often little thought went into the distribution language, leading to years of confusion and conflict between trustees and beneficiaries or among beneficiaries.
- Many such trusts opt for the simplest form of distribution: mandatory income, creating generations of subsidy and dependency.
It’s an enduring human truth that the manner in which a gift is given determines the manner in which it’s received. If a gift is made in haste, thoughtlessly, even fearfully—is it surprising that it be received with confusion, suspicion or even ingratitude?
For the same reasons, many of the grantors who created vintage-2012 trusts describe to us their feelings about those trusts with one word: remorse.
Thus our warning: hasten slowly. The work you’re doing for your client families is important and timely. But its importance lies not only in tax minimization but also in the effects that these structures will have on people’s lives for decades to come. Take the opportunity now to not repeat the mistakes of the past.
What’s to be Done?
In hastening slowly, what can wise advisors do, to maximize the likelihood that the 2020 vintage of trusts will prove more of a blessing for beneficiaries than a burden?
- Explain gift versus transfer: Sometimes new vocabulary prompts new understanding. Advisors should explain to their clients the difference between a true gift—which helps both giver and recipient grow and feel free—and a transfer, which just moves money from one individual’s accounting column to another. Clients know intuitively that transfers are more likely to result in remorse, confusion and conflict. Their goal should be to make a true gift.
- Help grantors to know themselves: A hard task, but the prerequisite for giving well. Help your clients vocalize and understand their motivations for giving. Give them the space to reflect on those motivations.
- Ask, “how much is enough?” Not just about the recipients, but about the grantors too. How much do they need to live? How much do they want to give to others during their lives? How much do they want to leave for their heirs? Clarifying these amounts begins to give them “a number” when it comes to their recipients. It also helps avoid the possibility that, once the gift is made, grantors feel that they have given more than they can afford.
- Promise a communication plan: A gift is never truly “complete” without communication to the recipient. Advisors can help their clients craft a communication plan to share the news about the gift at the right time, in the right way, with the proper recipients. A good plan covers the content, the tone and the process of communication. This plan doesn’t need to be in place before the gift is finalized. But knowing that you will help make it real will help grantors give thoughtfully.
- Help grantors to let go once the gift is made: This is a perfect role for a wise, trusted family advisor.
There are many other matters for clients to think about in giving well to family members, as we discuss in our books Cycle of the Gift, Voice of the Rising Generation, Complete Family Wealth and, of course, Family Trusts, as well as the article “A Reflection on the Often Unexpected Consequences of the Creation of a Perpetual Trust.”
We offer these qualitative steps as a complement to quantitative analysis. We hope that they help you help your clients find true joy in the 2020 vintage. They’ll thank you for it!