Millennials have surpassed Baby Boomers as the largest living adult generation.1 Twenty-five percent of Millennials are still living in their parents’ homes, which has resulted in 20% of the population living in multigenerational households.2 The Baby Boomers hold half of the $140 trillion of wealth in the United States, and their Millennial and Generation Z (Gen Z) children and grandchildren are projected to be the primary beneficiaries.3 One problem is that 61% of the Baby Boomer parents aren’t confident their children are well prepared to handle an inheritance.4 Additionally, 21% and 18% of the Millennials and Gen Z, respectively, don’t feel comfortable with handling an inheritance.5 This has resulted in only 33% of wealthy Baby Boomer parents having discussed their wealth with their children.6 Most believe their children won’t be mature enough to deal with wealth and inheritance until the children are in their 30s and 40s.7 As a result, beneficiary quiet trusts8 have gained enormous popularity. For birth years for the different generations, see “Generational Names in the United States,” this page.
Beneficiary Quiet Trusts
Beneficiary quiet trusts allow the parent or grandparent to keep the trust that they establish for their children or grandchildren quiet. Most beneficiary quiet statutes allow the grantors to determine which beneficiaries, if any, they want to receive information regarding the trust or whether they want the beneficiary to even know that there’s a trust in existence. Trust information can be provided to beneficiaries at some point in the future once it’s determined that they’re ready to receive such information.9
Giving While Living
The Baby Boomers have benefited from the great financial and housing markets in amassing their $140 trillion of wealth. Since 1983, the S&P 500 has grown 2800%, and the average price of a U.S. home has increased 500%.10 Because of this wealth increase, heirs increasingly haven’t had to wait until the passing of their elders to receive family assets. Giving while living has gained popularity.11 This is further fueled by the modern directed trust12 and the current $12.92 million federal estate, gift and generation-skipping transfer tax exemptions.13 Consequently, gifts to trusts have increased from 12.5% in 1995 to over 40% today.14
Mentoring Beneficiaries
The modern directed trust is the cornerstone of giving while living because it provides a powerful opportunity for family and family advisor involvement, which in turn allows for the mentoring of beneficiaries. These modern directed trusts are created with open architecture and are a collaborative relationship among beneficiaries, fiduciaries and trustees. Multiple trustees/fiduciaries and managers assume the duties once assigned to a single trustee. Functions are specialized regarding distributions, investments custody and administration. This provides a wonderful opportunity for mentoring the beneficiaries, which is extremely important to many families.
These modern directed trusts allow families to establish a trust distribution committee (DC). The DC determines trust distributions and directs the administrative trustee accordingly. Family members and their advisors can generally serve on these DCs and determine trust distributions of income and principal. Any trust distributions over and above health, education, maintenance and support (HEMS) would be considered tax sensitive and require an independent fiduciary (for example, corporate administrative trustee, CPA, attorney or a combination thereof) to make the distribution decision as part of the DC.15 In the event of sickness, disability or incapacity, the DC, comprised of family and family advisors, can flexibly deal with unanticipated family needs. The grantor and the beneficiaries can add or remove DC members.
Family and family advisor involvement on the DC16 can also provide for the promotion of family values (that is, both fiscal and social responsibility) because family members and family advisors play such an important role as mentors on the DC to the younger family members. The key ages for beneficiary development are generally 20 to 40.17 The ability to pass on family values intergenerationally is very important to many families. In addition, non-charitable modern directed trusts may be drafted to allow for distributions not only to family beneficiaries but also to charitable beneficiaries.18 Consequently, distributions to charity from a non-charitable modern directed trust allows for the promotion of family social responsibility desired by the family.19 Seventy-two percent of Baby Boomers donate to charities. These donations comprise 43% of all charitable donations. Eighty-eight percent of the Silent Generation donates to charities. Their donations equal 26% of all charitable donations. Additionally, 84% of Millennials and 59% of Gen X gift to charities.20 Many families recognize that successful family philanthropy can reinforce overall family values, thus strengthening a family legacy.21 Additionally, the distribution from a non-charitable trust to charity allows for an unlimited income tax deduction to the trust.22
In addition to a distribution committee, a modern directed trust also allows individuals to establish a trust investment committee (IC)23 that directs an administrative trustee regarding the trust assets. Like the DC, the IC is generally comprised of family members and trusted family advisors. The senior IC members can mentor the younger IC members regarding asset allocation and asset management. The IC may choose multiple investment advisors and managers based on their expertise regarding various asset classes/diversification. Family trusts may have either or both traditional investments and sophisticated investments based on, for example, a Harvard or Yale endowment-type asset allocation.24 Alternatively, individuals may select a large non-diversified single position in a public or private security.25 This could be a family business with a low cost basis that’s important to the family. The directed trust can hold both financial and non-financial assets (that is, offshore companies, business interests, real estate, limited liability companies (LLCs), family limited partnerships, timberland, direct private equity (PE), alternative investments and more).
Investment Management LLCs
Additionally, investment management limited liability companies (IMLLCs)26 have been an important addition to many families’ modern directed trust structures to further accommodate the families’ needs. The IC of a directed trust typically directs the administrative trustee to hold the IMLLC(s), which is responsible for the investment management and advisory of the trust assets. The trustee/trust generally will be the sole member (that is, owner of the IMLLC). The IMLLC is effectively a trust investment holding company for the family’s trust assets. A family member and/or family advisor can be named as the manager of the IMLLC overseeing the underlying IMLLC assets and reporting to both the IC and directed trustee. Thereby, the assets of the trust, whether they’re investment management accounts, real estate, PE, brokerage accounts or family business interests, can be owned by the IMLLC, which is owned by the trust. This structure maximizes administrative efficiency while at the same time allows the family to retain control of how the assets will be invested. Separate IMLLCs can be created for each asset class, or all assets can be titled to one IMLLC. For example, an IMLCC may be formed to hold the family’s commercial real estate holdings, another can be formed for its PE positions and another can be formed for its private placement life insurance.
The IMLLC can also be a powerful way for Millennials and Gen Z to assist with the trust investment advisory and management.27 For example, an IMLLC can be formed to allocate a portion of the trust assets to social impact investments generally desired by Millennials and Gen Z. One or more of the Millennial or Gen Z beneficiaries can be appointed as the manager of the IMLLC, thus allowing them to attain their investment priorities. Additionally, grantors may desire to do their own trading while they’re alive and of sound mind. To accomplish this with some or all of the trust assets, they can be appointed manager of an IMLCC so that they can have their own personal trust trading account.28 If properly established, this shouldn’t create any estate tax inclusion issues.29 The grantor may also be a member of the IC without any estate tax inclusion issues.30 However, special fiduciaries may need to be appointed to direct life insurance on the grantor’s life or a family business interest with the grantor as an owner to alleviate any estate tax inclusion issues.31 Even though there may be no estate tax inclusion issues, there may be other disadvantages to the grantor serving in these roles that need to be considered.32
The IMLLC owned by the trust doesn’t usually have to be established in the same state as the situs of the trust, but doing so may be an important advantage from an asset protection and/or tax standpoint.33 Most of the modern directed trust states also have LLC statutes that provide for charging order protection as the sole and exclusive remedy.34 Most of these modern directed trust states also have sole member LLC statutes allowing for the trust to be the sole owner of the IMLLC.35 Consequently, the IMLLC provides a very important second layer of asset protection to the trust assets.
Divorce
Some Baby Boomer and Silent Generation parents and grandparents are concerned regarding the divorce of their children and grandchildren and how this might affect their inheritance.36 Only 46% of Millennials are married.37 Twenty-five percent aren’t projected to marry until ages 43 to 53.38 Additionally, 40%-50% of first marriages end in divorce, and 60%-67% of second marriages end in divorce.39 Inheritances and gifts aren’t generally subject to divorce,40 particularly if gifted assets are in a trust. Most trusts have a spendthrift clause that prevents the attachment or assignment of a beneficiary’s interest in a trust, which generally prevents all but exception creditors from attaching the trust.41 Alimony is a spendthrift clause exception creditor in some states.42 One example is the Florida case, Berlinger v. Casselberry.43
In Berlinger, a father set up a third-party trust for his son. Florida statutes44 provided that alimony was an exception creditor to its spendthrift clause. Consequently, the Florida court allowed the writ of garnishment against a Florida discretionary trust. It’s important to note that if this trust was established in a modern directed trust state with a discretionary interest statute, garnishment wouldn’t have been permitted because there wouldn’t have been any “property” by definition in the trust. Consequently, the beneficiary of a discretionary trust (even HEMS standard) in these states doesn’t have a right to distribution or a property right. Therefore, no creditor can attach or force a distribution from the trust because there’s no enforceable right. Planning for inheritances to protect against family divorce has resulted in many trusts being established or moved to these modern trust states with favorable discretionary interest statutes.
Housing
As previously mentioned, many Millennials and Gen Z are still living at home for various reasons, for example, economics and the housing shortage.45 This has resulted in many Baby Boomer parents or Silent Generation grandparents buying homes with trust assets for Millennial and Gen Z trust beneficiaries.46 These homes are owned by the trust, usually using an IMLLC wrapper.47 The beneficiary is allowed to live in the home rent free.48 Additionally, the home should be creditor proof if the beneficiary gets married and divorced.49
Purpose Trusts
Many assets have been in a family for multiple generations, and their preservation is very important to the families. Purpose trusts are a great way for a family to both preserve these assets and allow families to share and use the assets.50 Purpose trusts don’t have any beneficiaries. Any legal purpose is generally allowed.51 Their sole purpose is generally to care, protect and/or preserve an asset, such as a residence or vacation home or items such as antiques, cars, jewelry, memorabilia, art, royalties and digital assets.52 Beneficiaries are allowed to “use” the family property owned by the purpose trust.53 There’s an individual appointed (that is, trust enforcer) within the trust to enforce the purpose (that is, preserving and maintaining the family asset owned by the trust).54 Additionally, a trust protector and directed administrative trustee are appointed.55 Depending on the state statute, purpose trusts can have a long term or an unlimited duration.56 Purpose trusts can also provide for the maintenance and preservation of family burial sites.57 They also allow for the care of pets, which are very popular family treasures.58 Millennials recently overtook Baby Boomers as the largest pet-owning segment of the population.59 Pet trusts are also purpose trusts. Despite what many families think, pets are property. More than 50% of Millennials have dogs. Additionally, Millennials and Gen Z like purpose trusts because they can provide for a philanthropic purpose that wouldn’t otherwise qualify for a charitable deduction.60 This is very important based on their outlook toward charitable giving and the various charitable causes they support.
A Process, Not an Event
Estate and trust planning can provide for both intergenerational family needs and desires as well as encourage behaviors in future generations that are consistent with family values. The trust terms, combined with the ability of senior family members to mentor junior family members, provide a roadmap to perpetuate family goals and instruct subsequent generations about the values the family holds in high regard, all allowing for both the protection and purpose for the family assets. Consequently, inheritance is a process, not an event, for many families.
Endnotes
1. Richard Fry, “Millennials overtake Baby Boomers as America’s largest generation,” Pew Research Center(April 28, 2020), www.pewresearch.org/short-reads/2020/04/28/millennials-overtake-baby-boomers-as-americas-largest-generation/.
2. Kristen Bialik and Richard Fry, “Millennial Life: How Young Adulthood Today Compares With Prior Generations,” Pew Research Center
(Feb. 14, 2019), www.pewsocialtrends.org/essay/millennial-life-how-young-adulthood-today-compares-with-prior-generations/.
3. Talmoon Joseph Smith and Karl Russel, “The Greatest Wealth Transfer in History Is Here, With Familiar (Rich) Winners,” New York Times (May 14, 2023), www.nytimes.com/2023/05/14/business/economy/wealth-generations.html.
4. Al W. King III, “The Next Tsunami—Charitable Giving With Non-Charitable Trusts—How The Wealthy Are Using Modern Trust Structures to Promote Social & Fiscal Responsibility,” Allied Professionals, Orange County, Calif. (October 2019).
5. Chloe Berger, “Boomers’ $72 trillion Great Wealth Transfer to millennials will probably come with some strings attached,” Fortune (July 21, 2023), https://fortune.com/2023/07/21/boomers-great-wealth-transfer-millennials-pros-cons/.
6. See supra note 4.
7. Al W. King III, “Should You Keep a Trust Quiet (Silent) From Beneficiaries?” Trusts & Estates (April 2015).
8. Ibid.
9. Ibid.
10. See supra note 3.
11. Ibid.
12. Al W. King III, “Supercharged Directed Trusts,” Trusts & Estates (April 2023).
13. See supra note 3; ibid.
14. Al W. King III, “Are Incentive Trusts Gaining Popularity?” Trusts & Estates (October 2017); Al W. King III, “Preserving Family Values by Encouraging Social and Fiscal Responsibility with Incentive Trusts,” 45th Annual Hawaii Tax Institute (Oct. 22, 2008).
15. Al W. King III, “Flexible Trusts to Deal with Future Uncertainties” Trusts & Estates (January 2022).
16. Ibid.
17. Al W. King III, “Interesting Trends With Millennials and Trusts,” Trusts & Estates (February 2021).
18. Al W. King III, “Charitable Giving With Non-Charitable Trusts,” Trusts & Estates (June 2015).
19. Ibid.
20. Michelle Plyem Kocin, “Charitable Giving Across Generations,” Sylogist,www.sylogist.com/post/charitable-giving-across-generations;
iDonate Staff,“Next Generation of Generational Giving: Who Gives the Most and Why,” iDonate, www.idonate.com/blog/next-generation-of-generational-giving-who-gives-the-most-and-why.
21. See supra note 14.
22. Ibid.; Internal Revenue Code Section 642(c).
23. See supra note 15.
24. Ibid.
25. Ibid.
26. See supra note 12.
27. See supra note 17.
28. Al W. King III, “Can a Grantor Have His Cake and Eat It Too?” Trusts & Estates (December 2019).
29. Ibid.; the grantor can usually retain powers over the trust investment management decisions without any IRC Section 2036 or IRC Section 2038 estate tax inclusion issues. SeeJennings v. Smith, 161 F.2d 74 (2d Cir. 1947); Old Colony Trust Company v. U.S., 423 F.2d 601 (1st Cir. 1970); Estate of Willard V. King v. Commissioner, 37 T.C. 973 (1962). Al W. King III, “How Long-Term Trusts Can Assist with Uncertainties Like COVID-19,” Trusts & Estates (August 2020).
30. Ibid.
31. Al W. King III and Pierce H. McDowell III, “Selecting Modern Trust Structures Based on a Family’s Assets,” Trusts & Estates (August 2017).
32. Ibid.
33. Ibid.
34. Most of the popular boutique trust situs states have sole member limited liability company (LLC) statutes allowing for a single owner (that is, the directed trust) as well as LLC sole remedy charging order protection as the exclusive remedy, thus adding another layer of asset protection to the trust. A charging order only gives a creditor the rights of a partnership or LLC interest, and it doesn’t give a creditor any voting rights. A charging order is simply a right to a distribution (if and when one is ever made), and it leaves a creditor without any means to force a distribution.
35. Ibid.; Not all states provide for such; selected sole remedy charging order protection statutes are: Alaska Stat. Section 10.50.380, 6 Del. C. Section 18-703, Nev. Rev. Stat. Ann. Section 86.401, S.D.C.L. Section 47-34A-504 and Wyo. Stat. Section 17-29-503.
36. Al W. King III, “Frequently Overlooked Trust Planning Considerations,” Trusts & Estates (June 2022).
37. Pew Research Center,“Millennial Life: How Young Adulthood Today Compares With Prior Generations” (May 14, 2020), www.pewresearch.org/social-trends/2019/02/14/millennial-life-how-young-adulthood-today-compares-with-prior-generations-2/.
38. Al W. King III, “Interesting Trends With Millennials and Trusts,” Trusts & Estates (June 15, 2021).
39. Petrelli Previtera, “Divorce Statistics for 2022” (Jan. 9, 2023), www.petrellilaw.com/divorce-statistics-for-2022/.
40. Cheryl Winokur Munk, “When One Spouse Gets an Inheritance, It Can Be Hard on a Marriage,” The Wall Street Journal (Sept. 13, 2020), www.wsj.com/articles/when-one-spouse-gets-an-inheritance-it-can-be-hard-on-a-marriage-11600043520.
41. A spendthrift clause generally restrains a trust beneficiary from alienating, either voluntarily or involuntarily, their interest in the trust (for example, for the benefit of his creditors). Consequently, it prevents creditors from attaching to the interest of the beneficiary in trust before that interest is actually distributed to the beneficiary. Both third-party and self-settled trusts typically include spendthrift provisions. Self-settled trusts are ones in which the grantor is also a discretionary beneficiary (or can be named typically from a class of which they’re included). Not all states have self-settled laws. Today, 20 states have self-settled laws. The top-tier self-settled states are Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
42. Al W. King III, “An Update on Third-Party Discretionary Trusts With Spendthrift Provisions,” Trusts & Estates (October 2019).
43. Berlinger v. Casselberry, 133 So.3d 961 (Fla. 2d Dist. Ct. App. Nov. 27, 2013) (husband and wife divorced; husband stopped paying alimony. Wife filed motion to enforce payment of the alimony in arrears and for contempt. A settlement was reached, and husband agreed to satisfy his delinquent alimony obligations. The trial court then issued writs of garnishment to the trustee of the husband’s trusts established by husband’s father).
44. Florida Stat. Section 736.0504(2) (discretionary interest statute). The court stated that under Florida law:
a former spouse may not compel a distribution that is subject to the trustee’s discretion or attach or otherwise reach the interest, if any, which the beneficiary may have. The section does not expressly prohibit a former spouse from obtaining a writ of garnishment against discretionary disbursements made by a trustee exercising its discretion. As a result, it makes no difference that the instant trusts are discretionary.
See also Mark Merric and Daniel G. Worthington, “Find the Best Situs for Domestic Asset Protection Trusts,” Trusts & Estates (January 2017).
45. See supra notes 1 and 14.
46. Al W. King III, “Trust Options for Residential Real Estate,” Trusts & Estates (August 2015).
47. Ibid.
48. Ibid.
49. Ibid.
50. Al W. King III, “Trusts Without Beneficiaries—What’s the Purpose?” Trusts & Estates (February 2015); Charles E. Rounds, Jr. and Charles E. Rounds, III, Loring and Rounds: A Trustee’s Handbook Section 9.27 (2015); Alexander A. Bove, Jr., “Rise of the Purpose Trust,” Trusts & Estates (August 2005); Alexander A. Bove, Jr., “The Purpose of Purpose Trusts,” Probate & Property (May/June 2004); Alexander A. Bove, Jr., “Trusts Without Beneficiaries: Planning With Purpose Trusts,” Boston Bar Association (Oct. 21, 2014); Alexander A. Bove, Jr., “Trust Protectors: A Practice Manual With Forms,” Section 10.5, at pp. 136-137 (2014).
51. See King, ibid.
52. See supra note 36.
53. See supra note 50
54. See supra note 49.
55. See supra note 50.
56. See supra note 51.
57. See supra note 50.
58. See supra note 49.
59. Jason Fulford and Tamara Shopsin, “Why Millennials Are Obsessed With Dogs,” The Atlantic (July 29, 2021), www.theatlantic.com/magazine/archive/2021/09/why-millennials-are-so-obsessed-with-dogs/619489/.
60. See supra note 38.