Integrating a Trust into a Beneficiary’s Personal Financial Plan

Talking about money with family generally is difficult. But not talking about it, especially when family trusts are involved, could be costly.

Absent full communication, your loved ones could unintentionally undermine not only your carefully structured strategies to provide for their future, but their own personal financial plans as well.

Imagine a husband and wife who have funded trusts to fully pay for their grandchildren's undergraduate degrees. Meanwhile, the children's parents are diligently saving for college using a 529 plan, a terrific tax-free higher education savings option.

The parents are vaguely aware that the trusts have been established, but they do not know the balances, how the trusts are invested, or the terms of distributions. The grandparents don't offer trust details and the parents don't ask for fear of seeming greedy or ungrateful.

Fast forward 15 years. The 529 plans hold $200,000 per child. The trusts each have the same balance. The children's undergraduate educations are significantly overfunded.

But both the trusts and the 529 plans have significant restrictions. If 529 funds are not used for college expenses, you face ordinary income tax plus a 10 percent penalty on all accumulated earnings. This can be significant after 15 years of saving. If you had deducted contributions on your state income tax return, you also may have to recapture those deductions.

Ideally, the grandparents' trusts have the flexibility to allow use of the funds for other purposes or the children continue through graduate school and use all available funds. If not, however, you could be left holding large account balances that must remain intact until the next generation uses them for college or face substantial taxes and penalties.

Most importantly, what if the parents had sacrificed some of their own retirement savings in order to fund the 529 plans? Those 15 years of lost savings cannot be replaced.

Your advisor can be an excellent resource to help you and your beneficiaries understand how trusts and estate plans will affect beneficiaries' financial plans. Too often people learn inheritance details too late, when they are sitting in the probate attorney's office. Let's work together now to ensure this doesn't happen to you or your beneficiaries.