Balancing legacy goals with family needs

Setting up a family trust is a common approach to help protect assets and ensure funds are distributed according to a person’s wishes. With multiple beneficiaries to the trust, however, potential conflicts can arise.

Components of an effective family trust

“Communication and flexibility are crucial components of an effective family trust,” says Harry Drozdowski, family office senior trust advisor at Wealth & Investment Management, Wells Fargo Bank, N.A. From his perspective, you don’t really have an estate plan unless you’ve communicated specifics of what’s in the plan to your beneficiaries. Communication helps set clear expectations to guard against big surprises later.

Flexibility should be built into the construction of the trust so it can withstand unanticipated family conflicts or future disagreements. Drozdowski said some trusts will designate specific items to go to a beneficiary, but another option is to let beneficiaries take turns selecting items from the trust to allow for choice. For money from the trust, the most flexible approach is to divide the funds into equal shares for each beneficiary to spend as they choose.

Trust construction can also help address competing priorities. For example, if a trust created by a deceased spouse provides that income is to support her surviving husband during his life and then pass to her children, the surviving spouse and the children may have conflicting views on how the trust is managed and invested. The surviving spouse may want to maximize the income the trust generates, while the children may want to maximize the long-term growth of the trust. These competing interests can foment and lead to resentment between beneficiaries. In other words, if conflict is possible or expected between beneficiaries, you may want to remove shared interests. Perhaps instead of a shared trust with lifetime and remainder beneficiaries, each beneficiary could get their own immediate trust share.

Family communication is key

Here again, communication can come into play. While children may already consider the trust assets to be their money, the older generation may need to make it clear that they intend to enjoy their retirement today without being made to feel guilty.

One potential solution: Divide assets into two separate segments, giving the parents or surviving spouse assets for income while the other portion potentially grows assets for adult children.

Clear rules and provisions for situations when beneficiaries aren’t able to run the family business together or share a family vacation home can be spelled out in the trust. For example, there could be provisions for one beneficiary to buy out another or for the family home to be sold and the proceeds divided evenly between beneficiaries.

An outside perspective

“Appointing a third party as trustee, as opposed to choosing one over other siblings to fill those duties, can be an effective way to help minimize or overcome conflicts,” explains Drozdowski. The third party should have the expertise and objectivity to manage the trust without those family dynamics.

Choosing a third party as trustee eliminates creating a situation of one sibling having power over the others in a role as trustee. Even for siblings who may have gotten along well in the past, Drozdowski notes that in his experience it’s best to set up a trust “so you’re not giving them a reason to fight.”

In the instance of a more unique trust, such as a one set up for a sibling with special needs, a third party can be the trustee but also work alongside family members designated as special trustees because of their knowledge of the sibling’s personal situation.

Regardless of the specifics in the family trust, keeping potential challenges in mind at the outset should lead to better trust construction and better outcomes for all parties involved.