Interview with Daniel F. Lindley, President Northern Trust of Delaware on the Basics

Several weeks ago I received a disturbing phone call. It was from my distant cousin Russell who I hadn’t heard from in over two years. Russell began the conversation with some small talk, but then got right to the point.  He needed a loan of $500. I said, “What!”  “Russell, when your father died less than two years ago, he left you an inheritance of over $2 million, mostly cash. What happened?”

In about five minutes I had heard an astonishing story. Russell had told me that he lost his entire inheritance. I immediately had an idea of what happened. You see, I knew Russell to be a foolish gambler and was known for making poor business decisions. Putting a $2 million bank account under his control, in my opinion, was dangerous.

He told me that he felt that he could run the money up to $8 or $9 million in Las Vegas, but after six short months, most of the money was gone. To make matters worse, he took the rest of the money and placed it on a concentration bet on some high-tech bulletin board company that went into bankruptcy about 6 months after his investment.

Russell’s story of a squandered inheritance is not unique. It was his story, and that fact that most American milionaires have failed to prepare even the most basic estate plans motivated me to write this article.

Earlier this week I spoke to one of the nation’s leading trust experts, Daniel F. Lindley, President of Northern Trust of Delaware.

We talked for close to an hour about Delaware dynasty trusts, their powerful benefits, and the amazing flexibility they offer for parents to provide a safe transition and transfer of wealth from their generation to future generations. Dan offers a strong case why Delaware is one of the best states in the country to host a dynasty trust.

TRUST BASICS

Lindley explained that in 1995 Delaware repealed the rule against perpetuities. Without it trusts can exist only as long as the grantor is alive. The rule against perpetuities abolishes this requirement and permits the trust to remain in force forever.

Lindley added that a Delaware dynasty trust offered compelling benefits:

• Tax Benefits. Assets contributed to the trust can continue for successive generation of the grantor’s descendants without incurring any additional gift tax, estate tax or generation-skipping transfer tax.
• Control Benefits.  After the parents or grantor passes away, the trust may be administered to provide for care for the assets for the heirs and the heirs descendants.
• Doubles and as an Asset Protection Trust. If structured properly, the dynasty trust can be arranged to first provide asset protection benefits for the grantor and second conversion to a dynasty trust upon the passing away of the grantor.
• Administrative Trustee. A dynasty trust may also be arranged to serve as an administrative trust, thus permitting the trustee to direct the trust assets to to an outside money manager or wealth advisor.

A dynasty trust is an irrevocable trust that is defective for income tax purposes. Therefore, once money and property are contributed to a dynasty trust it’s one-way. To change the trust you have to go through a protracted procedure in order to get it out.  Once it’s created it’s permanent and cannot be changed without either going to court or gaining the consent of all the adult beneficiaries or both.

ECONOMIC BENEFITS

A client’s ability to contribute assets to a trust that will continue for generation after generation without the imposition of any transfer tax is a compelling benefit.

The trust makes sense when you compare the benefits the trust offers to the alternative  of passing assets outright, from generation to generation, subject to federal estate tax. The following chart, provided by Northern Trust Company illustrates that a $1 million contribution to a trust, a 5% after-tax rate of return on the investment assets, a new generation, subject to federal estate tax of 45% applied at each generational transfer, the dynastry trust would have an approximate value of $39 million after only 75 years.

The same $1 million held outside of the trust, subject to gift and estate tax occurring at each successive generation would have an approximate value of only $6.5 million. With the passage of each generation, the difference in value between the dynasty trust and the no-trust alternative becomes exponentially larger.   

CONTROL FROM THE GRAVE

Had Russell’s father created a dynasty trust with some basics of Lindley’s suggestions that are explained further, Russell would probably still have most of his inheritance in place.

Lindley explained that trusts can be as simple or as complicated, controlling or generous, as the parent’s (grantor’s) desire. The grantor can install provisions in the trust instrument to change the level of distributions or even suspend distributions. Inducements can be created to provide for rewards or punishment that may influence the behavior of the beneficiaries.

Discretion may also be given to the trustee to make decisions about behavior. The trustee in essence becomes an institutional parent administering responsibility, education, and enforcement of the activities and wishes of the deceased parents.

On the positive side, this can include rewards for good behavior, for children graduating college or completing a certain degree; and can encourage heirs or children to go out and make a good living by providing a matching distribution.

For example, if the inheritor makes a half a million dollars in an enterprise, the trust could match that by giving the inheritor an additional distribution of a half a million dollars from the trust corpus, given of course the funds are there and available. The trust could even reward inheritors or children for having other children to continue the dynasty. These are powerful financial incentives that can reward positive behavior and can ensure the long lasting of one’s family.

On the negative side, onerous trust provisions can be included to discourage self-destructive behaviors.  Examples include: substance abuse, compulsive gambling, leading unproductive lives, and being a spoiled trust fund baby lying on the beach and doing nothing but clubbing and womanizing. This can also include creditor problems and provisions may allow the trustee to keep track of a beneficiary’s FICA score to determine that they are not misbehaving by borrowing too much. Another important feature that could be included would punish the providing of false or misleading information to a trustee to gain advantage.

Based on his experience, Lindley said all of these examples and more have been used in the past and set a good template for possible dynasty trust wording to discuss with your estate planning attorney.

SUMMARY 

What is a dynasty trust?

A dynasty trust is an irrevocable trust that has two important key features to it. First, it permits the transfer of wealth from one generation to the next generation without paying federal estate tax as one generation ends and the other begins. Second, a dynasty trust provides for a means of control over the disposition of money to the children and heirs to ensure the safety, protection and long lasting of the funds.

Who should set one up?

Any parent that has $1 million or more to leave to one or more children.

Why set up a Dynasty Trust?

To ensure that the trust assets are not needlessly taxed and that the funds that are gifted to the heirs are not lost or squandered.

When should parents set one up?

Hopefully before the parents die but preferably as soon as possible as contributions to the trust can be made at any time.

Where is the best place to locate the trust?

Delaware.  Although other states exist that have repealed the rule against perpetuity and those include South Dakota, Nevada, Alaska, Wisconsin, Idaho, Illinois, Maryland, Virginia and Rhode Island.

How does one go about setting one up?

There are three key components that need to be dealt with in setting up a trust.

1.         An advisor. Someone preferably from the wealth management organization needs to motivate the client of the necessity for the trust. This should not be a one-time presentation. It should be ongoing and once the trust is started the involvement should be part of the relationship manager’s duties.

2.         An estate attorney to draft the trust instrument. This does not have to be an attorney in Delaware.  It can be anywhere although a Delaware attorney should review the trust for legal conformity.

3.        A. Trustee.  Because it is an irrevocable trust either an attorney or an institutional trustee must be appointed to serve as trustee. It’s preferred that an institutional trustee be appointed since decisions may need to be made after the death of the grantor and for many generations. A trust company will not pass away, but an attorney can.

TIPS ON MAKING THE CLIENT PRESENTATION

As a wealth manager speaking to your clients it’s important not to become mired down with detail.  Although clients have an appreciation for the fact that you may know your material  and be able to get into the weeds and discuss trusts at a technical level, the bottom line is they may not care – but they want to be sure you know the technical part.

Because they trust you as their advisor they feel comfortable looking to you as a confidant and family mentor. You should offer them guidance on what they should do to be certain that their children and their children’s children will be safe and have enough money to live fruitful lives. This of course, includes money for college education, housing, food, subsistence, and a lifestyle in the same manner or better than they are now living or better.

It is best to start the client conversation with the concept that you may be offering a product. You can start with this question: “Are you familiar with the benefits of a dynasty trust.”

Telling a client that you offer trust services or offer trust advice gives the client nothing concrete, but telling the client that you could arrange the set up a trust or a dynasty trust rings in your client’s mind as concrete. It creates curiosity and bewilderment, enough emotions to open the learning process so that they are receptive to what you have to say.

The marketing message should be plain and simple. As Dan and Chip Heath say in their book Made to Stick, it’s best to dumb-down the presentation, add colorful metaphors, and lots of examples like my cousin Russell’s story to get your message through.

RETAIN CLIENTS FOR GENERATIONS

As mentioned, a dynasty trust be also be an administrative trust. This permits the trustee to appoint an investment advisor to manage the funds. This is one of the  services of Northern Trust of Delaware. This appointment can ensure that your wealth management organization will be on-board for generations to come.

As starting point, my staff is preparing a complimentary Power Point presentation available to you in a coming edition of the Trust Advisor. If you would like some additional support or suggestions on how to begin now, please feel free to email at at thertrustadvisor@gmail.com