TRUST & ESTATE SERVICES

Trusts To Match The Times

Balancing your family’s long-standing values with the challenges younger generations face in today’s world can be tough. Discover how our innovative trusts can help build better plans for transferring your wealth.

11.02.2021 - Thomas E. Junkin, Senior Vice President, Personal Trust Services and Operations

Trusts have proven their worth over centuries because they are useful. Trusts for minor children, spousal trusts (especially between people in a serial marriage), trusts protecting vulnerable people, are so common that I’d say at least one version probably appears in almost every will. We also know the times and family circumstances have evolved over the years. That’s why, working with clients, we frequently diverge from the well-worn path and suggest alternative trust approaches.

We have found three types to be especially useful for solving problems faced by modern families. At Fiduciary Trust Canada (FTC), we call them Family Package trusts, Mulligan trusts and Mentor Me trusts. While these aren’t legal terms, the names are a clue as to each trust’s focus. Here’s a closer look at how these creative trust structures help address today’s concerns.

Family Package Trusts

“The great use of life is to spend it for something that will outlast it.” William James

I’d say most beneficiaries would welcome the news that they have inherited $1-million as part of their parents’ estate. Their lives could change in many ways. For instance, the beneficiary could now be certain funding will be available for their children to attend university, trade school, or travel.

What if the $1-million inheritance came packaged inside a kind of container that might save the family thousands of tax dollars over many, many years? And, what if that same money was safe from creditors should the beneficiary divorce or go bankrupt? Would that be an even better gift than a direct cash gift?

Such advantages are fundamental to the Family Package trust. For example, in his will, Frank directs that daughter Donna’s share of his estate is to be held in a fully discretionary family trust for Donna’s benefit and that of her children and grandchildren. Donna might be the trustee of the family trust or co-trustee with a trust company. Donna can choose to wind up the trust, but if it continues, she can allocate trust income to herself or any of her children or grandchildren, to be taxed in the recipient’s hands.

Donna can pay for private school, or university tuition, or a new car, or a trip to Paris on behalf of her children using money that has been allocated to the children and taxed in their hands. When they are very young or young adults, they can likely receive thousands of dollars of trust income without paying any tax. All the expenses, which Donna would probably have paid for from her inheritance anyway, can be paid with pre-tax dollars instead of after-tax dollars.

What if Donna is in a shaky marriage? If she doesn’t use trust funds to support an extravagant lifestyle that she and her partner could not otherwise afford, there’s a good chance her inheritance might not be taken in matrimonial property and shared with her ex-partner should they divorce.

Finally, if Donna keeps the trust going throughout her life, the assets will not be considered part of her estate and would pass to her beneficiaries without probate.

A Family Package trust can be a gift that gives across generations. 

Mulligan Trusts

“I did then what I knew how to do. Now that I know better, I do better.” Maya Angelou  

For golfers, a mulligan—the welcomed free shot friends sometimes allow when your previous shot was so poor—is well known. The Mulligan trust recognizes that one’s financial life can sometimes unfold in a similar fashion.  

For instance, it’s almost universally understood that receiving a windfall, such as a large inheritance, at a young age can lead to euphoric spending. Most people have heard about someone’s friend or relative who spent their inheritance on fast cars, expensive vacations, and frivolous expenditures. It’s rarer to hear about a young person setting aside an inheritance to accumulate and grow, giving them financial freedom later in life.

With that in mind, a trust structured so that funds are distributed in separate tranches as a beneficiary grows older and hopefully wiser is a kind of insurance against the risk of a wasted inheritance. For example, Frank directs in his will that son David’s share of the estate will be distributed as follows: one-third at age 30, one-half at age 35, and the remainder at age 40.

This strategy also allows for the optimism of funding youthful dreams, such as owning a home or starting a business, with a backup plan in case it doesn’t work out. 

Mentor Me Trusts

Tell me and I forget, teach me and I may remember, involve me and I learn.” Xun Kuang

A Mulligan trust is one way parents can try to ensure their children will have a secure financial future. Another approach is reflected in the Confucian philosopher’s words above and is the foundation for the Mentor Me trust.  

Some surveys show that upwards of 80% of people have not introduced their heirs to their advisors.1 The Mentor Me trust offers a way for parents to introduce their lifetime trusted advisor to their children so the latter can continue to benefit from the experience and family knowledge of that advisor.

This type of trust requires either a corporate trustee (a trust company) or a trusted family member or friend who is both knowledgeable about investing, and willing to take on a mentorship role.

Here’s the idea. In her will, Francis creates a Family Package trust for daughter Dianne. The initial trustee is FTC. The trust terms state that at age 25, Dianne can begin to receive trust income, which she can spend freely. At age 30, Diane becomes co-trustee and shares responsibility for decision making with FTC. At age 35, Dianne can choose to remove FTC and become sole trustee if she feels she can manage the work on her own and wants to assume all the duties.

Throughout the trust’s initial 10-year lifespan, the trust employs the family’s financial advisor, Greg, to provide financial advice to the trust and to mentor Dianne on investing and wealth management practices.

FTC and advisor Greg meet regularly with Dianne as she progresses from beneficiary to joint trustee and perhaps to sole trustee. Along the way, Dianne benefits from a decade of observing and participating in trustee decisions, learns stewardship principles including creating investment policy statement, documenting decisions, etc. She receives personal financial planning advice from advisor Greg. When she reaches age 35, she has these decisions to make:

  • Does she keep the trust going as a gift that gives over generations?
  • Does she assume the role of sole trustee, dealing with accounting, tax returns, etc. or does she keep working with FTC?
  • Does she continue to work with Greg as her trusted advisor?

This example shows that a trust can be both a Family Package trust and a Mentor Me trust.

Planning For Times To Come

As life’s ups and downs evolve, some things remain constant. As with previous generations, parents are concerned about their children’s futures after they’re gone. Questions such as: How do we help ensure our children make the most of their inheritance are top of mind. It’s our job to help you find the answers to suit today’s world. The Family Package, Mulligan, and Mentor Me trusts are just three ways we can help.

FOOTNOTES:

  1. “Are Your Heirs in the Dark? How to talk to your heirs about their inheritance,” Investment Planning Counsel, 2017, https://www.ipcc.ca/documents/23852/29830/AYW_Are_Your_Heirs_In_The_Dark-E-book_EN.pdf.

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Thomas E. Junkin, Senior Vice President, Personal Trust Services and Operations

TRUST & ESTATE SERVICES

Trusts To Match The Times

11.02.2021 Thomas E. Junkin, Senior Vice President, Personal Trust Services and Operations

Balancing your family’s long-standing values with the challenges younger generations face in today’s world can be tough. Discover how our innovative trusts can help build better plans for transferring your wealth.

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