By: David R. Foster, JD, AEP, CLU, CHFC, CAP FLMI
Nine Tips for Maximizing the Impact of your Trust
Trusts are commonly used as an effective means of managing, protecting and transferring a family’s financial wealth. But like so many things in life, you only get out of it what you put into it. Trusts should not be parked in your estate planning garage and forgotten about. They need to be gassed up and taken for a spin occasionally to make sure they still accomplish what you intended them to accomplish. And typically, when you do, you’ll realize that the engine needs a small tweak here or there. The good news is that trusts are not rigid – they can be worked on, modified, and improved upon to meet your goals. With that said, if you have implemented a trust, consider the following tips for keeping it in top condition:
- It may not be the most entertaining way to spend an evening, but it is important to fully understand the terms of your trust. All those complicated articles, sections and subsections actually grant rights, create obligations, require parties to act, limit their actions, allow for distributions, provide protections, provide for contingencies, etc. A plain English summary of what all that legalese says can be invaluable.
- Trusts are very flexible – There are many ways a trust may be modified or even terminated. Even trusts that are irrevocable aren’t as irrevocable as you might think. Some states may allow changes to be made based on agreement from the grantor (person creating the trust), the trustee, and all the beneficiaries, while others may require court approval.
- Don’t underestimate what may be accomplished with a well-designed trust. In addition to the basic advantages such as avoiding probate, controlling the transfer of your wealth, and providing professional management of your assets, a well-designed trust may also accomplish the following:
- Keep family wealth in the family bloodline.
- Protect the family wealth from being squandered by future generations.
- Minimize wealth transfer taxes including estate, inheritance, gift and generation skipping taxes.
- Provide funds for a special-needs child without reducing their access to government assistance programs.
- You may be able to retain control over management of the trust principal without losing the advantages of creditor protection and tax savings.
- Provide a lifetime of income for a surviving spouse while assuring the remainder benefits your children and grandchildren (and only them).
- Support charitable causes – For example, one specific type of trust provides annual income for yourself or family, distributes the remainder to a charity of your choice, and allows you to receive a substantial current year charitable deduction.
- Reduce state income taxes on the sale of a business or other appreciated property.
- Retain the right to borrow money from the trust with favorable loan terms.
- Provide for the education costs of future family generations.
- Provide for the health care costs of future family generations.
- Don’t overestimate what may be accomplished with a trust – There are many instances of promoters marketing trusts based on false promises. For example, while living trusts provide a number of advantages, they accomplish few if any of the tax advantages many promoters claim. Another example is a promise of blanket protection from creditors. Trusts are often touted as providing protection from creditors, but that protection may be overstated. In most states (but not all), the typical language used to protect the trust principal from a beneficiary’s creditors will not be effective against claims related to alimony or child support (for obvious public policy reasons).
- As family dynamics, goals and circumstances change, it is important to make sure your trust continues to serve your purposes. For example, as your family grows your goals may shift to providing for generations beyond your children. When you established your trust, you may have been a business owner looking to pass the business down to your children, but now your children have chosen career paths that do not involve the business. Other family circumstances like divorce, remarriage, incapacity, estrangement of a family member, etc. may trigger the need to review the terms of your trust.
- Another reason to review your trust on a regular basis is the changing legal and tax landscape. The Tax Act of 2017 made sweeping changes to the tax code. The Act substantially increased estate tax exemptions, contained favorable tax provisions for businesses (which may be owned by trusts), changed trust tax rates, etc. Trusts should be reviewed to assure there are no issues created due to these changes. For example, many trusts contain formulas that could cause one spouse to effectively disinherit the other spouse upon their death – an unintentional travesty caused by the combination of unchecked trust language and increased estate tax exemptions. The SECURE Act, which became law in December of 2019, may require changes to trusts that were established to receive qualified retirement plan or IRS funds.
- Communication is key – When heirs and beneficiaries are not brought into the conversation as wealth transfer decisions are being made, it increases the risk of family discord. Family discord turns into legal arguments and court battles, which lead to broken family relationships. Simply implementing a trust does not remove this obstacle. The more the beneficiaries understand the reason the trust was established, how it will function, how decisions will be made, who will make them, and why – the more likely you are to avoid family discord.
- There are opportunities that may require action on your part. Trusts aren’t something you sign and walk away from. Don’t think of them like trees that you plant in the woods and let nature take its course. Think of them like flower gardens that need watched over and tended to. For example, many trusts permit the trustee and grantor to “swap” assets of equal value. There are a number of ways the grantor may create substantial tax savings for their heirs by acting on this right. But the grantor would need to take action in order to take advantage of this provision.
- Choosing a trustee may be the most important decision you make – So the trust document should allow changes to the trustee (within limits – too much flexibility could cause other issues). It is important to have a trustee that can manage the specific assets or property the trust is to own. For example, some trusts are intentionally designed such that any taxable income generated by trust assets are taxable to the grantor even though the grantor has no access to trust income or principal. This may be a good thing from a wealth transfer / gift tax standpoint but could also cause unexpected tax bills. If a trust was initially meant to invest solely in a life insurance policy (which if managed properly should not trigger any taxable income), and that policy either lapses unintentionally or is surrendered intentionally, this could trigger taxation to the grantor. An inexperienced trustee who is not familiar with the taxation of life insurance policies and/or the taxation of trusts could easily create tax problems for the grantor.
Symphonic Financial Advisors offers complimentary trust reviews to all of our clients. Please contact your advisor for more information.
DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.