I spoke to a friend today on the phone, and her parents (who are in their 90s) just recently revamped their wills/estate planning. I can only go by what she is telling me, but from what she says as she understands it (she has read the documents) the gist is that they have now set up a trust for the benefit of their daughter (my friend) and her sister for their lifetimes with any remainder going to the grandchildren. My friend has one child and her sister has four. My friend’s one child is the eldest of the grandchildren, and he is the executor and trustee. He is 32 and the others are 21 and up. According to my friend, there are no required annual distributions of income out of the trust for her and her sister. All distributions to my friend and her sister will be have to be approved by him as trustee. He is a CPA and CFP and absolutely more savvy with money than either my friend or her sister. However, neither of them are spendthrifts at all.
Obviously, the parents can do what they want with their money. I’m mostly just curious to know if this is a common thing - skipping over a generation in such a way. I would understand it more if there were some sort of well-defined income distribution to each of the daughters every year, but according to her, their isn’t. Friend’s relationship with son isn’t all that great/close, and he himself now has a child. She and sister have done SO much for the parents, and this has really “stung” my friend.
I guess I’m nosy as I’d really like to look at the documents to see if she is reading/understanding them accurately.
My parents will probably be doing the same thing. Probably a good thing from the standpoint of the individual grandkids if they all get equal distributions. But a possible negative from the viewpoint of the parent with fewest (grand)kids assuming they were expecting equal distributions.
In the case of your friends they’re still getting money directly, albeit via a trust. Not sure why that would hurt anybody’s feelings as their kids are going to be taken care of.
This doesn’t necessarily sound bad, I see advice sometimes to leave money for your adult children in trust, so that the money will not be taxed as part of their (the adult children’s) estate, and cannot be accessed by their creditors or ex-spouses. So if your friend causes a car accident and gets sued, the plaintiff could not go after trust assets. Or if your friend gets divorced, the trust assets won’t be part of what is being split up.
I am not personally a fan of doing things this way, and there are tax and paperwork costs to doing it, but some estate attorneys seem to strongly recommend it.
As to who the trustee is and what they have to do to access the money, that could be an issue or no issue at all. Is the one grandson really the only trustee? I think it is more common that the adult children would be trustees (and that their be separate trusts for each adult child), with the option of appointing co-trustees if needed. If the grandson really had the only decision power on how the assets are invested and how much can be spent, that sounds problematic.
Is the dollar amount large? It may be helpful for your friend to pay an attorney to help her understand the documents.
I only personally know of one person who did this, and the child in question has an ongoing substance abuse issue, so it’s been done to protect the inheritance for the grandchildren. Doesn’t sound the same type of context as what you are describing at all.
As for how common it is, well, it’s just not something that seems to come up in discussions. Is it usual for people’s friends to talk about how their parents structure their wills?
Typically the way this happens is that each sister will tell the son how much they need over a full year, and then, if there are extenuating circumstances (medical expenses, new car, etc.) they’ll have to go to the son for “extra.” But typically they wouldn’t be going to the son every single time they want to, say, go to the movies.
@MomofJandL - I think I am going to suggest this to her. I did tell that at least they were informing her of the changes. I had another friend who got blindsided by an unexpected change his dad had made after the son had helped run the family business in a small town for years while the sister “played” in a large, nearby city.
This is fairly common in wealthy household as a tax management/minimization strategy. The Generation Skipping Tax was specifically put in place in 1976 to deal with it.
My parents have a generation-skipping trust and we may choose one eventually. The way my parents’ works is they have made specific bequests for each of the adult children (me and my siblings) and the remainder will be split by the grandchildren. Each grandchild will get a token amount then the rest will be divided by family. So if the trust were worth 100K and they had two children, one with two children and the other with three and they set the token at 4K each of the two grandchildren in the first family would receive 24K and the three in the second would get 17.33K
ETA: The reason they’re doing this is that the adult kids are all financially secure and starting to look at ways to hand down their own money. This will save on estate taxes.
I recently learned of a situation where a father not only skipped his child but wrote a scathing will detailing what a horrible dd she was and so he was leaving his money to her children. She was not a horrible dd, and she was delighted for her kids to get the seven-figure-each inheritance as she would’ve spent the money on their education anyway.
Maybe I’m not understanding this-how is this “skipping a generation”? It sounds as if the grandparents are leaving their estate to their daughters. But a grandchild will be trustee (and that IS weird to me).
My interpretation of generation skipping would be that the adult daughters would not be beneficiaries, and instead, the estate would pass directly to the grandchildren, whether in trust or not.
Maybe a lawyer can correct me if I don’t have that straight.
I’m not a fan. When I spoke with my son about how I help out my sister with $$, and would he continue that, he said he preferred I leave her more of a percentage. He didn’t want his aunt having to turn to him to ask for money.
@bookworm, that’s a good point. Has the grandson in OP’s case agreed to be the trustee? What if he doesn’t want to. It can be a simple job that doesn’t take up much time, or a major hassle, depending on how others in the family behave.
@Nrdsb4 - I suppose it isn’t technically “skipping.” She’s offered to send me the documents, but I’d really rather not wade in. They are family friends, and I know them all.
The estate is going into a trust. The trustee is the eldest grandson (son of my friend). The trust is to be used for their benefit during their lifetime, but there is no set distribution amount or requirement of income being distributed each year. My understanding (based on her understanding) is that distributions to friend and sister are solely at the discretion of the the grandson. I’m sure they could schlep him to court over breach of his fiduciary duty if he were being stingy, but who would want that? Hopefully, everything will go amicably when the time comes.
She did tell me she had a legal person read over it. That person said the intent is to protect against creditors, plaintiffs, predators (neither is currently married) so as to preserve the wealth for the grandchildren.
I don’t like the idea of anyone other than the person who made the money controlling the purse strings for someone else unless the beneficiary is disabled or has a serious addiction. I think the situation described by the OP is especially likely to cause family friction.
I know a family with a pooled trust from which the three beneficiaries can draw up to a third. The problem is, how do you define a third when the account is earning interest on the whole and people are taking out money at different times? Just that issue has caused strife in the family.
Would the friend be happier if her son wasn’t the trustee? Is she worried about that? I’m sure they can hire a trustee but they would charge them for that.
I guess I’m beginning to understand, although it sounds like I don’t have any relatives who have enough money that it would matter to me.
I’ve seen more than one instance where the ex-wife had to plead with step son’s for $$, even tho the estate was large. Also, not every young person is responsible for keeping track of the management of the estate.
If my son refuses the role of executor, our lawyer will step in. She’s a family friend. That doesn’t mean she won’t charge for her time and expertise, but after 30 years, I trust her more than any other family member.
Very common especially for wealthy families where large amounts of real estate, bonds, cash involved. Skipping a generation will minimize taxes as well. My grandma in law set up a trust for one of her son because she believes that the woman he married is a gold digger. All of what he inherited are in a trust including the house he lived.
When my grandparents died my mom purposefully set it up with her parents so her inheritance went into the grandchildren’s 529s. But, it was my mom’s choice and she was still the executor. My mom also split the inheritance equally between my brother and I so my D technically got more than her cousins because we only have one living child and my brother has two. I’ve never discussed it with my brother so don’t know his feelings about that.
I wouldn’t love the trustee getting to decide on the distribution. I would want that spelled out in the will.
MIL didn’t skip the way your friend’s parents plan to, she just allocated her close-to-seven-digit estate 30% to each of our two sons, 20% to my husband (her only child), and 20% to charity. Kids get theirs at 30, and older son already hit that.
One of our sons is seriously considering using the money from her to donate to causes they had in common. Other son, if he doesn’t donate, will tuck it out-of-sight-out-of-mind and invest it. They’re both savers in comfortable circumstances and neither one of them has changed his priorities or the way he lives.