By Beth Schanou, JD, CExP, Senior Wealth Planner
Clients frequently ask whether they should leave their assets in a trust. My answer: It depends. If your net worth plus the death benefit of life insurance policies you own exceeds $13 million, putting your assets in specific types of trusts can be helpful for federal estate tax issues. But for most Americans, federal estate taxes will not be a major concern.
So why else would you want to leave your assets in a trust? Before you say, “I don’t,” or “It’s too complicated,” take time to learn more about what a trust can do for you – especially if you are in a blended family or in a relationship but not married.
What Is a Trust?
A trust is a legal arrangement under which you transfer assets to a trustee’s care. The trustee then holds and manages those trust assets for the benefit of one or more beneficiaries. Within that trust there are instructions on exactly how and when to pass assets to your beneficiaries.
Managing assets requires time and patience. At some point, you might not have the time or the interest to stay on top of your assets, or you might lose the ability to because of illness. A trustee can manage your assets for you and your loved ones if and when that time comes.
That sounds simple enough, but a trust is also so much more. It’s a multipurpose planning tool that delivers a surprisingly wide range of benefits beyond potential federal estate tax strategy. Let’s take a look at a few scenarios that might call for a trust and the potential benefits.
Protecting Assets Against Lawsuits
We live in a litigious society. If your child inherits your assets outright at your death, the funds could be subject to creditors, divorce and lawsuits. Leaving the assets in a trust can help protect your child’s inheritance against such losses.
For example: After receiving his inheritance from you, your son hits a bus full of lawyers. Without a trust, that money would likely be gone before he could count it. But if the inheritance were in a trust, it would be protected against legal judgments.
Protecting Assets for “Spendthrift” Children
What if your child has compulsive buying disorder – in other words, a shopaholic or spendthrift. Would he or she blow through an inheritance meant to last years in a matter of weeks?
If you set up a trust, your money stays in that trust for the benefit of your shopaholic child upon your death. The trustee distributes an amount on a monthly basis for your child’s support and pays a monthly allowance.
In this scenario, can your child go to the bank and pledge their trust as collateral? No. Why? Because your child doesn’t own the assets, the trust does. The trust acts as a barrier and protects your child from him/herself. Trusts and wealth planning can work together for a healthy future for your child or family member.
Protecting Assets for Children with Illness or Addiction
There are other reasons you would want to protect your children from themselves, such as if your child suffers from a mental illness or an addiction or your child would have difficulty managing their own assets due to lack of time and/or ability. A special needs trust document helps with these situations in managing the assets over their lifetime.
Or, what if you die when your child is unmarried with minor children. No prince/princess charming can marry them and take their money since it’s in the trust.
What about divorce? Picture this – you die, your child inherits your money outright, then later gets a divorce. The assets that are in the marital estate could be part of the division of property. Instead, you could leave your assets in trust for your child at your death. If they later divorce, the trust is generally not considered marital property.
Benefits for Non-Traditional Couples
Not only can a trust protect your children, but it’s a great vehicle for holding assets for the benefit of a significant other. Unmarried couples need to execute the right agreements and other documents, because many states do not provide the protection you likely want.
Consider your home. You don’t want your partner to be forced to vacate your home when you die, so trust is a solution. You could create a trust with your partner and place your house in the trust. Then you and your partner can determine how things would go if one of you dies so that the surviving partner doesn’t lose the home if their name is not on the title to the property. Consult with an estate planning attorney in your state for specific guidance.
Benefits for Blended Families
Trust planning can be one of the most powerful avenues for settling your affairs, taking care of your loved ones and carrying out your wishes. This is especially true when you have a blended family. Life insurance, inheritance tax and real estate can get complicated in this situation. Blended families take many forms – married couples in which one or both spouses have children from a previous marriage, for example.
For blended families, certain trusts can provide financial support for your spouse and your children. For example, you likely want to avoid the situation in which your children don’t get anything because everything is left to your surviving spouse.
Benefits for Those Who Are Charitably Inclined
If you like to give to charity, you might also want to consider establishing a charitable remainder trust (CRT). A CRT allows you, as the grantor (and possibly your spouse and children) to receive an annual payment from the trust during your lifetime. When the CRT terminates, the balance goes to a charity or a donor-advised fund.
You may also receive an income tax deduction based on what the charity will receive from the CRT. These trusts can be a great tool to handle distributions from qualified plans, as well. This is especially crucial since the passage of the SECURE ACT to ensure your IRA won’t pass directly to a child as a beneficiary and cause an unwelcomed tax event due to the shortened time horizon during which the account must be distributed.
Negating a Probate
Having a properly drafted and funded trust could help your beneficiaries avoid the court-supervised process of settling your affairs – also known as probate.
Probate is a hassle in many states. People like the idea of avoiding probate for the sake of privacy and efficiency, or even avoiding estate attorneys and fees. By and large, probate adds cost and time to the process of settling your affairs. Not to mention, it’s a public process. When your will is admitted to probate, it becomes public record and is viewable by anyone who wishes to see it.
Trusts can be a way around that. So, before you decide that having a trust is too much work during your lifetime, too complicated and too expensive to have included in your estate plan, consider the many benefits a trust can provide not only during your lifetime but for your loved ones after you die.
Talk to Your Financial Advisor Today
We offer private trust services as well as comprehensive financial advice. Get in touch today to see how we can help you put together a financial plan for you and your family.
Beth is a registered representative of Cetera Advisor networks LLC.
This article is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.