What to Do with an Estate with Foreign Assets (Even that “Little” Bank Account in Europe)
I also work with "Inheritors" managing wealth built in prior generations for the benefit of descendants.
Although every instance has unique aspects, in general, I find that Wealth Creators have conflicted feelings about what being Inheritors will mean for their descendants.
They often tell me they don't want their children to have "too much" wealth.
Obviously, this presents a difficult question: how much wealth is too much? Answers to that question vary.
Amidst that variance, a very common instinct is that even if they aren't confident about whether their children (or, instead, charity) should receive the bulk of their wealth, they do want to leave assets in trust to pay for their descendants' education.
This instinct makes a tremendous amount of sense, and I never discourage it.
Education is a critical component of human capital formation, and human capital has often been the unique element in why any particular Wealth Creator built such success.
If funds are going to be left in trust for descendants' education, what should the key provisions of those trusts be?
If a family doesn't have detailed preferences, an education trust will probably be written to provide for the "education" of descendants.
A more specific trust might expressly include independent primary and secondary schooling, along with undergraduate and postgraduate education.
This is all well and good but (for Wealth Creators especially) it sometimes raises concerns about descendants becoming "professional students."
No one wants to be anti-intellectual, but it is often true that certain programs of study feature a higher return on investment than others, and that the costs of various programs (even those in the same field) vary dramatically.
In the last several years, I've seen Wealth Creator clients take two particularly thoughtful approaches to reducing risks posed by the "Professional Student Problem."
You could describe the first approach as the "State University Funding Cap."
A client taking this approach might limit annual trust distributions for education to the then-current combined tuition, room, and board charged by the in-state public flagship university where the beneficiary is then living. (For reference, that amount is $26,700 at the University of Kentucky this year.)
The trust might also provide that such distributions would be made for only four years (for undergraduate work), or for the standard length of the graduate program that was being funded.
A second approach is "Loan Payoff Upon Completion."
With this approach, a beneficiary might assume student loans, but if a program was completed on time (and perhaps with a minimum GPA), then the trust could make distributions to pay off the loans.
Sometimes Wealth Creators want to create a multi-generational educational "endowment" for their descendants (or, perhaps, descendants of siblings).
I think trusts written for this purpose are best designed when they anticpate the following trust administration issues:
If a trust is only intended to fund beneficiaries' education, then there may be years (or periods of many years) when no descendants require any distributions for education, and it might make sense for the trust to acknowledge this.
It's very likely that certain branches of a family will have more descendants than other branches. Settlors should consider actual (or perceived) fairness issues that may arise as time passes, and a family tree changes.
Certain beneficiaries may want (or require) expensive education (including graduate school) and others might not. If potentially unequal distributions aren't seen as a problem, the trust should expressly allow this inequality.
In most situations, the eventual expansion of a pool of descendants and trends in education cost inflation will likely leave the trust substantially depeleted. An inflation-adjusted minimum floor (for instance, $250,000 or $500,000) below which the trust will be distributed outright to family or charitable remainder beneficiaries may make very good sense.
These "family educational endowment" trusts tend to last a long time. For that reason, using a corporate trustee may make more sense than using an individual trustee. If the trust is intended to fund education costs of more than one branch of a family, any particular family trustee might be biased, and using a corporate trustee can increase actual (and perceived) fairness in trust administration.
It's been interesting working with both Wealth Creator and Inheritor clients to help them create education trusts.
You won't often meet a client with strong opinions about allocations between principal and income, or about estate tax apportionment.
In contrast, almost everyone tends to have strong opinions about what they want for education trusts.
It's natural that these opinions would reflect their own experiences and values. I think that's appropriate.
After all, isn't education all about one generation passing to the next not only knowledge, but also experiences and values?
The takeaway for clients and their advisors is that personalized design of education trusts so that they fit a particular family's needs and situation is possible - and it may be one of the most important "non-tax" estate planning issues.