Deciding how your children should inherit your assets after your death might be one of the most difficult processes parents will undertake —
One of the biggest errors parents can make is spending too much time creating the legal entities known as trusts and too little time on the kinds of conversations that will help ensure that trust among siblings is maintained when parents are no longer around to settle disputes.
When creating the legal documents parents often name siblings trustees of other siblings’ trusts — or even pick a friend or relative to do the job. And it might seem like a natural thing to do.
But keeping these complicated and stressful decisions in the family or among friends can create a heavy burden. Trustees have very specific legal and financial responsibilities that a family member may not understand. And they risk legal entanglements if they fail to act in a responsible manner.
“You have to understand what you’re asking someone to do,” said Sharon Klein, president of the New York Region of Wilmington Trust. “Even the appearance of impropriety can cause problems. The people who are left out feel antagonistic.”
This is where corporate trustees come in. “They have a lot of experience,” said Lynn Halpern, managing director and senior fiduciary counsel at Bessemer Trust. “They’re dispassionate.”
They’re not free, however. A corporate trustee can cost about half a percent of the account’s value per year (although that doesn’t include money management fees, which can hover around 1 percent, depending on the account size). But they’re cheaper than years of lawyers if a legal fight ensues.
Of course, picking the right person to stand in for you and spare your children is key. William D. Zabel, founding partner at Schulte, Roth and Zabel, had blunt advice: “Don’t use the small town bank.”
As one of the country’s leading trust and estates attorneys, Zabel said he’s seen many instances in which the bankers, attorneys, accountants and other professionals in a small town close ranks when out-of-town attorneys arrive to challenge the decisions they’ve been making. The locals may favor the local children over the ones who moved away and can play favorites in subtle ways. Equal is not fair if one sibling gets cash and the other gets real estate or securities set to appreciate, for example.
Of course, how this kind of situation is handled depends on the bank and the town. Some might argue they know the family and its needs far better than outsiders.
Outsiders aren’t impervious to mistakes. The widow of an American Airlines executive recently won an $8 billion judgment against JPMorgan Chase for how it managed distributions between her and the man’s children from a previous marriage.
This is an extreme case, but it behooves the person setting up the trust to put in provisions that would allow a trustee to be replaced. This generally requires the beneficiaries to agree on the terms, but it must be put in the legal documents ahead of time, Klein said.
Another consideration is whether siblings should be expected to work out their disputes after parents die — especially if they couldn’t do it while their parents were alive.
Separate trusts for each child — not one large children’s trust — can mitigate some of this friction. “One sibling is then free to raise their own challenges,” if he or she disagrees with something an adviser has done, Halpern said. “The other benefit of allowing different family members to have their own trusts is they can choose their own trustees, and they don’t have to have the same trustees across the board.”
It also keeps siblings from knowing each other’s business.
Finally, to give your children the best chance of staying on good terms with each other, advisers say write both a financial will that leaves them the assets and an ethical will that conveys guidance to them.
“I hear a lot that my kids never fight and this won’t be a problem,” said Covington Edwards-Pitt, chief wealth advisory officer at Ballentine Partners. “I say you don’t know that until you really live through it. You won’t really know until you put them in it.”
Who’d want to chance it?
This article originally appeared in The New York Times.