"They don’t feel comfortable talking about it," Udell says. "But you know you’re going to have a family meeting—it’s either going to be when you’re alive or when you’re dead—and you’re better off having a say in it now."

TOP VIEW Family principals have many reasons for creating a generation-skipping trust for their heirs— from avoiding inheritance taxes to ensuring future generations are well provided for. But they can also be utilized to keep funds from children or their spouses who may engage in profligate life choices. Experts stress that the primary method for preventing such a trust from breaking family bonds is clear and honest communication.

Families can avoid the hurt feelings and confusion that sometimes accompany GSTs by openly explaining the rationale behind choosing this type of trust. Jack Edgar, managing director of Legg Mason Investment Counsel, encourages his clients to share their intentions with their children and clarify the significant upsides of protection from creditors, taxes and divorce. Even when clients choose a generation-skipping trust that includes their children as beneficiaries—with the grandchildren next in line—their adult children can see it as a vote of no-confidence. Without a conversation, kids often think, "‘Why didn’t Mom and Dad leave it to us outright?’" Edgar says. "With a little education, you can usually get around it and kids realize the benefits."

Several years ago, Stuart Lucas became an advocate for encouraging his family to develop a plan for educating the next generation. A fourth-generation heir of E.A. Stuart, founder of Carnation, Lucas understood the stakes personally, as well as professionally, through his advisory practice as chairman of the Wealth Strategist Network in Chicago. He believed that articulating the family’s values by composing a family mission statement could help prepare the next generation of Carnation heirs, some of whom are now in their midteens. However, his family refashioned his suggestion. Instead, they began articulating their values more organically by talking about how they would manage a jointly owned summerhouse. The summerhouse (or for another family, perhaps a business) helped the family find common ground—or what Lucas refers to as "finding family affinities."

Complex Division
Even in cases in which all family members are beneficiaries, unintended tensions can emerge—particularly when individuals believe the trust benefits family members unequally. When creating a GST, grantors must decide whether to divide assets to beneficiaries by family branch or by number of offspring. Those wanting to divide equally among siblings should choose dividing per stirpes, which treats each child equally, as opposed to each grandchild.

Even in cases in which all family members are beneficiaries, unintended tensions can emerge.

Consider a couple with two children. One child has four children, the other, just one. If a $10 million trust is divided up per stirpes, the four siblings would receive $1.25 million each and the fifth grandchild, $5 million. If, however, the trust is divided equally among all five grandchildren, each would receive $2 million. In that case, "Some parents will argue that you penalize them because they only had one child," Lucas says. "This isn’t necessarily so. The key goes back to communication and values—if you can get the values component right, everyone will understand."

Grantors can also disrupt future generations if they do not properly plan for how a trust distributes assets. Trusts designed to produce consistent income, for example, are often heavily invested in bonds and fixed-income products. But this mix can fail future generations by hindering growth. A better choice is to align current and future beneficiaries’ interests through paying 2 to 4 percent of trust assets rather than net income, Lucas says. "By setting a fixed spending rate, everybody benefits," he notes.