In Part II we discussed ways to transfer wealth to our children. We also met Tom and Sally Ray. Tom is a cardiologist and Sally recently returned to work as a realtor. Both are in their late forties. They have two teenage children, Jane and John, and a net worth of $3,000,000. Their wealth is expected to reach $9,000,000 in less than ten years.
The Rays asked me to assist them in creating a legacy for their family. They wished to leave their children more than just financial wealth; they wanted to provide them with lessons and values to help guide their lives after Tom and Sally are gone. They also wanted to provide some asset protection for the inherited wealth in case their children encountered some difficulties during their lives, such as drug abuse, lawsuits, bankruptcy or divorce.
To create their family legacy, the Rays shared with me what is important in their lives and within their family. For them, their family values included professional achievement, academic excellence, a spiritual home life, social contribution, financial responsibility, community involvement and devotion to family. We began designing their legacy plan with a customized, comprehensive revocable living trust for both Tom and Sally and transferred all their assets to the trusts so that probate would be eliminated and the trustees could maintain control of their property upon death or incapacity.
Inside the revocable trust we created a lifetime trust for each child that springs into effect when the surviving spouse dies. This type of trust provides the greatest amount of asset protection and guidance for John and Jane throughout their lives. A professional trustee, along with a relative as a co-trustee, serves as the “gatekeeper” of the trusts. The trustees have ultimate discretion when and how to release the money in the trust to the children, and are guided by instructions and values that Tom and Sally draft into the trusts.
Once both Tom and Sally die, the estate is divided equally into each child’s lifetime trust. The trusts allow the trustee to distribute trust income and principal from to a child for their health, education or maintenance, so long as they are living by the family’s values. If a child gets into drugs, gambling or has other problems, the trustee can turn off the “spigot” and refuse to distribute assets from the lifetime trust until the child shapes up, cleans up and gets back on track. Meanwhile, the trust allows the trustee to “redirect” the trust’s assets to assist the child by paying for the counseling, drug testing, therapy, etc. necessary to help the child get back on their feet.
The Rays included extensive guidelines and values for their children in each lifetime trust. For instance, they directed that their trustee may assist a child by distributing income and/or principal out of a trust for:
- A down payment towards purchasing and furnishing a home.
- A down payment towards purchasing or establishing a business or professional practice.
- Travel to foreign countries for cross-cultural experiences and education.
- The reasonable expenses of a first wedding and honeymoon.
- Expenses while a child’s a full-time student maintaining at least a 2.5 GPA.
- Expenses while a child is pursuing an educational, scientific or charitable goal which is in the best interests of the child and the public, and which makes the child a productive member of society.
- Living expenses if a child becomes disabled and is prevented from being a productive and self-supporting member of society.
- Expenses or income replacement if a child is occupied in full-time caregiver for family members such as children or other relatives and that obligation precludes the child from earning a living (a stay at home parent, for example).
- Supplemental income and expenses if a child is employed full time in an occupation to which he or she devotes at least 35-40 hours of work per week or is pursuing a career full time which is low-paying but socially productive, such as a missionary, teacher, artist or musician.
- Any other extraordinary expense that is in the best interests of the child.
Additional language ensured that the trustee would consider the future probable needs of the child, and would help educate the child on the long-term tax advantages of retaining funds inside qualified plans, IRAs and such.
The Rays’ goal was to set up their estate plan so that the wealth left to their children would not be a burden or negative influence, but would provide a positive structure with incentives and directions to enable Jane and John to make the most out of their lives. By using lifetime trusts with detailed instructions, values and guidelines, the Rays succeeded in protecting their hard-earned wealth from their children’s “inabilities, disabilities, creditors and predators” and have provided their children with invaluable guidance and financial support that will create a legacy to benefit their descendants for generations to come.