Constructing a Family Financial Scaffold

By Jeff Maurer | June 24, 2021

I really like scaffolding as a metaphor for supporting our families.

I like it so much that I’m borrowing it from Dr. Harold Koplewicz, President of the Child Mind Institute, author of The Scaffold Effect: Raising Resilient, Self-Reliant, and Secure Kids in an Age of Anxiety and our guest on a recent client webinar (see the recap here) – and extending it to wealth management.

Isn’t some measure of financial scaffolding exactly what many of us are trying to provide our children and, perhaps, grandchildren and future generations?

Think of a scaffold outside a building – easy enough if you live in New York or another big city. It typically enables the building to rise higher. In wealth management terms, this means providing just the right degree of financial support and structure to allow children to fulfill their potential. The best scaffolding will vary by family and for each family member, as each individual is unique and will develop – and will come to define happiness and success – in his or her own way. But truly supportive family financial scaffolds generally have three common elements. Let’s review them here.

First, sustainable financial scaffolding is built on a firm ground. In this sense, parents understand and are comfortable with their own financial future before extending support to others. This means thoroughly reviewing lifestyle goals and analyzing cash flow to account for aging, balancing family needs with philanthropic commitments, and other, less foreseeable changes. Once the foundation is set, the scaffolding can rise.

Second, the focus of the scaffolding tends to be on educating the next generation. That doesn’t just mean funding tuitions and learning experiences, although that is a big component in most family financial superstructures. It also means providing the scope, restraint and flexibility to educate children to understand how fortunate they are to have this support, and working to instill strong, lasting values that they can share with future generations.

Third, the scaffold construction should be flexible, able to adjust to changing family structures and circumstances. Trusts can be very effective scaffolding tools, if structured and administered appropriately.

That’s the theory. Here’s an example of how a strong scaffolding that included a thoughtfully drafted, well-administered trust can work in practice.

A couple who negotiated the successful sale of their transport company several years ago were able to fund trusts for their two children using their full estate and gift tax exemptions. At the couple’s deaths in 2020, the trusts were worth $40 million and the remaining $30 million left in the couple’s estate was left to a family foundation. The co-trustees, a relative and a corporate trustee, like all good trustees, had and continue to have important decisions to make. (See the Independent Thinking article, Choosing the Right Trustees here.)

Provisions were made to protect the couple’s children from the financial consequence of divorce, and to restrain overspending and deter them from other potential errors in judgment, but thankfully, the protection provisions were not needed. Both children, now middle-aged, are happily married and enjoy rewarding careers. One of the siblings counts on the trust income to supplement a modest salary as a professor; the other hasn’t needed the income since she graduated from medical school, has a financially rewarding career and is married to a corporate executive. So managing that discrepancy by providing an income to the first and agreeing to accumulate distributions in favor of growth for the second makes sense here.
The next generation – the grandchildren of the benefactors – requires careful consideration, at present particularly the young adult children of the financially better-off couple.

One of the two young adults has special cognitive needs that means he’ll require lifetime support; the other has just earned a PhD in special education. Their parents, with the help of the trustees, have made the appropriate provisions in their wills to ensure care for the older child (while ensuring that he remains eligible for public benefits over his lifetime). The daughter will become a co-trustee of her brother’s assets if she is willing and when she is prepared. Ultimately, the assets will be redirected to the daughter and her future family.

Their cousins, the children of the professor and his librarian wife, are still in high school. But the parents are already preparing them to be good custodians of the wealth they stand to inherit. With the potential risks as well as opportunities in mind, they have included many of the provisions in their own wills that the grandparents did in the original trust, to protect and encourage the children in whatever their futures hold.

The family foundation is a charitable trust with five members of the family – both sets of parents and the adult daughter – serving on the distribution committee and the trustees managing the assets. The foundation supports research into autism as well as a medical fellowship program at the grandmother’s medical school. This reflects the current interests of the family and will evolve as their interests evolve, and will help keep the family engaged and together sharing their grandparents’ values as well as wealth across generations.

Well-crafted and properly administered trusts can serve as financial scaffolds for families, even for generations. They can provide help when it’s needed and encourage the beneficiaries to reach new heights.

Essential considerations to address in your scaffolding trust

Provisions that provide the most flexibility are best.

How long should your trust last? The longer, the better is the answer for most families establishing a trust, to serve multiple generations. Keep in mind that the span of the trust may be limited by state law, and the trust can be terminated at any time by your trustee or by your primary beneficiary at his or her death.
What can the trustees do with the income and the principal of the trust? The trustees should have the ability – and flexibility – to vary the timing, amounts and proportions of payments to the beneficiaries, as individual and family circumstances evolve. This includes paying out all of the principal and terminating the trust if appropriate.
What happens on the death of the primary beneficiary? The primary beneficiary can have the right to direct in their will how the trust passes on his or her death, in equal or unequal shares, outright or in trust. Absent such direction, the trust can continue for the next generation.
Beneficiaries should have the right to change trustees, especially a corporate trustee. A corporate trustee should be replaced with another corporate trustee to retain institutional supervision.
For families with special circumstances, such as those with a large, closely held business or multinational families, a more complex trust may be appropriate. Please see the article by Alex Lyden-Horn titled, Crossing the Delaware: Directed Trusts For Complex Families here.

Jeff Maurer is the Chairman of Evercore Wealth Management and Evercore Trust Company. He can be contacted at maurer@evercore.com.

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