A recent column of The Ethicist in the New York Times involved questions about a trust worth millions of dollars that would go to grandchildren yet to be born. The question came from an adult child whose parents were setting up the trust, with the adult child and his brother as trustees. The trust would provide that if there are no grandchildren, the trust would be allocated for charitable purposes, particularly to support disadvantaged regional children, with the two siblings overseeing the disbursements. The adult child questioned the idea of leaving assets to hypothetical future descendants instead of existing family members and wondered whether there was a moral dilemma because the trust incentivized the siblings and their partners to have children for their own (perceived) financial gain.
The issues raised in the column are timely and faced by many families who are doing planning that’s driven by maximizing use of the generation-skipping transfer tax exemption, notes Patricia Angus, a family enterprise consultant and adjunct professor at Columbia Business School in New York City, where she founded the Global Family Enterprise Program. She explains that because advisors to high-net-worth clients are so focused on the upcoming potential sunset of the high transfer tax exemption amounts and the possible increase in tax rates, they’re recommending GST trusts to many of their clients. When there are no grandchildren yet, this is having a strange impact on their children, who are having a hard time understanding why they are being overlooked for the benefit of people who aren’t yet born. In these cases, the complicated financial and psychological impacts on their children are being overlooked.
Communication Is Key
Angus says that it’s important for the grantors to talk to their children about their estate plans and the impact those plans will have on the family. She notes that when her clients don’t take this step, it can lead to fractures and misunderstandings in the family. In the case of the family involved in the column, the parents and brothers should meet to discuss the parent’s goals and the brothers’ roles in meeting those goals. If these goals aren’t outlined in the trust, the parents could write a separate letter of wishes to say how they want the trust used.
The grantors should also define what they mean by “grandchildren." There are so many new definitions of family and many ways to have children (for example, in vitro, adoption, stepchildren and foster children). Do the parents intend to include all these when they refer to grandchildren beneficiaries? Practitioners should carefully draft the trust documents to ensure they reflect the grantors’ intent regarding whom they consider grandchildren.
Trustee’s Job
Once they have a better sense of what the grantors want to accomplish with the trust, trustees need to understand that their job is to carry out the grantors’ wishes, not their own, points out Angus. She says that a trustee who isn’t comfortable with the values or purposes expressed in the trust agreement may be better off not accepting the trusteeship or resigning. The brothers in The New York Times column seemed to believe that their values should guide their role as trustees. However, they need to learn more about the specific terms and purpose of the trust, as well as any restrictions that might exist for them as trustees of a trust for their children.
Angus notes that trusts may, depending on the language, provide incentives for specific behavior of their beneficiaries. It’s quite interesting, and perhaps a bit amusing, to think about whether a child is given an incentive to procreate just so that they can create beneficiaries who will benefit from a trust set up by their parents.
