How, and when, a business owner should divide assets among children is one of the toughest questions in estate planning. Should your children share the assets equally? Does one child deserve more (or less) than the others? Are they ready for the responsibility?
Instead of putting off these decisions—and risking the consequences—establish a discretionary family trust. This involves placing assets into a trust established for your beneficiaries. If the trust is designed as a discretionary trust, none of the beneficiaries have any fixed entitlement to the assets. Instead, the trustees have full discretion to manage the assets and make distributions.
Case Study: Asset protection for succession
When applied to a succession plan, use of a trust can also provide:
- The ability to accrue future growth in the family assets and be taxed in the hands of the beneficiaries; and
- Creditor proofing for the family assets (from both the beneficiaries themselves and their creditors).
Recently, we used a discretionary trust to help a family achieve its succession planning goals. Harold and Hannah Berkowitz* decided to address their succession issues 20 years ago, when they were in their 60s, and plan for the eventual distribution of their business and real estate assets (worth close to $50 million) to their six children.
Although most of their kids were responsible, the Berkowitzes had serious concerns about giving money to a few of them (due to drug addiction, in once instance).
The couple ultimately established a discretionary family trust for the benefit of their children and grandchildren, and transferred the portfolio of assets to that trust. There was little appreciated value in the assets because of the 1990s recession, which meant no significant tax was triggered.
The trustees have discretion to manage the assets and make distributions
The couple and a family friend acted as the trustees and, over the years, made distributions to the beneficiaries. Further, they delegated much of the management of the assets to one of their sons (who had always been involved in managing the family’s real estate holdings).