These estate planning tools can help you pursue numerous wealth transfer goals, but selecting the right trustee can be critical to their success. If your estate plan already includes a trust—or several—you have an idea how flexible and useful trusts can be. But to the uninitiated, trusts can sometimes seem confusing and intimidating.
Questions that come to mind:
- Are they designed to reduce tax liability?
- To hold back an inheritance until a child is mature enough to handle the responsibility?
- To make sure your intentions about your wealth are realized when you’re no longer around to weigh in on a particular matter?
Actually, trusts can do all of that, and more. And though many are complicated—responding to the complexities of a changing tax code, for instance, and complex personal financial situations—they needn’t be intimidating. When the American Taxpayer Relief Act of 2012 was signed into law early 2013, many questions about the fate of the estate tax were finally resolved. Wealthy individuals can start to move forward more decisively with important estate planning, and there are several compelling reasons to consider using a trust.
Reason 1: To Protect and Control the Transfer of Wealth Even though it might seem counter intuitive, trusts create more flexibility and control than giving property outright to people. Not only do trusts afford tax-planning strategies unavailable with outright gifts, but they can provide greater control over the “who, how much, when and how” you distribute your wealth. In other words, trusts allow you to give property to those you want to benefit, when and in ways you desire, while also protecting it for them—from themselves and others, including potential creditors. For instance, many people want to leave a legacy for their children but don’t always want them to receive full control of the assets all at once, or when the heirs might be too young to handle the money responsibly. Trusts can be structured to control the timing and amounts of distributions, and also the reasons and conditions under which those assets might be withheld or given. You could, for instance, create a trust that holds and invests your assets held for the benefit of your children but allows distributions to meet only certain expenses — education, healthcare and so forth—until they reach a certain age. Distributions can be either at the discretion of a trustee or mandatory. Trusts can be as restrictive or as flexible as you desire, depending on tax or nontax objectives.
Reason 2: To Fulfill Philanthropic Commitments For most wealthy individuals, philanthropic goals are critical components of an overall wealth plan. Trusts can be designed to ensure that your family’s philanthropic vision is translated into a strategy that results in meaningful impact. Trusts can help you fulfill commitments in a way that is consistent with your lifestyle, may reduce your tax exposure and, if desired, can involve your children and grandchildren.
Reason 3: To Reduce Estate Taxes The desire to reduce taxes is sometimes the overriding motivation for creating trusts, while in other cases, different considerations take precedence. But even then, once the nontax aspects of the trust are addressed, it will also be designed in the most tax-advantageous way possible that is consistent with your goals. The bottom line is that trusts can be used to exclude some assets or post contribution appreciation or income from your taxable estate. You can also obtain tax benefits during your lifetime by creating a trust that will fulfill your charitable donation objectives at your death but that provides you with income until then.
Reason 4: To Protect Assets From Creditors and Others Many parents worry about their wealth passing to a daughter-or son-in-law in the event of a divorce. While well-drafted prenuptial agreements can help prevent that, trusts can be structured to provide additional protection for divorced children and grandchildren. Trusts can also help beneficiaries with disabilities, especially if they incur substantial healthcare costs, and can be used to help shield assets of people whose work puts them at higher risk of litigation—doctors or real estate professionals, for instance
Reason 5: To Provide Ongoing Financial Management If you decide you no longer want the burden of managing your financial assets, or if you suddenly become unable to manage them effectively yourself, perhaps as a result of an accident or illness, a trustee can assume the management and investment responsibilities, often with no significant disruptions.
A Process – Not a Product
Understanding the potential benefits of trusts is only the first step. The types of trusts and trust strategies are as varied as the people who create them, and while a single trust can be complicated, multiple trusts can be combined in even more complex ways. Among tax-motivated trusts, for instance, dynasty, marital and credit shelter trusts are common. Among the many irrevocable trusts, marital trusts may be the most popular. If you’re motivated by reducing potential estate taxes, grantor retained annuity trusts (GRATs) are a frequent choice. And then there are charitable trusts, and a host of other possibilities.
But selecting an appropriate trust is not like ordering from a menu. You don’t simply order five GRATs, two dynasty trusts and a marital trust. It’s more useful to think of creating trusts as part of an integrated planning process. Developing a wealth transfer plan is not about choosing individual trusts but rather it is about a process of identifying and achieving objectives and building a relationship with your advisor.
That process begins with in-depth conversations between you and your advisor. As advisors, we need to understand your financial situation in detail, as well as your objectives, both for yourself and for those you’d like to benefit. Then we can make suggestions in terms of specific techniques and structures that might be suited to you. There’s a common misconception that a trust is simply a wrapper for investments, but it’s far more than that. Viewing trusts only as a way to manage assets loses sight of all that a trust can provide.
If you have any questions about creating a trust or finding a trustee to administer it, give Bressler & Company a call at 559.924.1225.
This article was taken from U.S Trust online, and was written by Douglas Moore and James Marlon.
