How a Trust Could Help You Efficiently Transfer Wealth to Your Heirs

Talking with clients about the legacy they wish to leave behind is an essential part of my job as a financial advisor. How do they want to share their wealth with loved ones and charities that matter to them? What values do they want to pass down and what financial goals do they want to support for their children and grandchildren? How can they transfer their assets in a tax-efficient and planful manner? These are some of the many questions we cover in the course of these conversations.

If you find yourself asking similar questions about your own legacy, it may be time to think about whether a trust would make sense for your situation. Read on for a primer on how trusts work and their key benefits. 

What is a trust? 

In the simplest terms, trusts are legal entities that hold assets for the benefit of another. Trusts have three core components. A grantor is someone who creates and typically funds the trust. A beneficiary is someone who receives benefits from the trust assets, such as income, principal, or the right to use property (like a home). A trustee is someone who holds the legal title and manages the trust assets according to its terms. The trustee can be the grantor, another person considered qualified to handle trust administration, or an institution, such as a bank.

When the grantor sets up a trust, they specify: 

• the intended purpose, 

• named beneficiaries and trustees, 

• provisions about when and what benefits/distributions each beneficiary will receive,  

• the trustee’s duties, and 

• when the trust will end. 

Key trust attributes 

Trusts might take effect while you’re living or upon your death. Here is a brief overview of the most common types of trusts:  

Living trusts vs. testamentary trusts

Living trusts, as the name implies, are established and funded during the grantor’s lifetime. The assets in a living trust can remain available for the grantor’s use and benefit during their lifetime, and usually pass to beneficiaries only after the grantor’s passing. Similar to a will, a living trust provides the grantor broad discretion to specify how assets are distributed to the named beneficiaries. For example, a beneficiary may need to reach a specified age before receiving assets from the trust. Because assets held within a living trust typically avoid probate upon the grantor’s passing, they may be transferred with less delay and expense. The trust’s assets and terms typically remain confidential among beneficiaries, as compared to the public disclosure usually involved with probate.

A testamentary trust is established at your death based on instructions laid out in your will. A trustee is identified who will manage assets on behalf of the trust’s beneficiaries. After the will goes through probate, designated assets are shifted into the trust. The grantor can specify in advance how trust assets should be managed and how they are to be distributed to beneficiaries. 

Revocable trusts vs. Irrevocable trusts

Trusts can be revocable or irrevocable. Only trusts that are established during the grantor’s lifetime might remain fully revocable. This allows the grantor to alter the trust or even cancel it altogether if desired. While that flexibility can be beneficial, there are no immediate tax advantages and no creditor protection for assets held in the trust. 

An irrevocable trust typically limits the grantor from making any meaningful changes to the trust. When established, the grantor often gives up ownership and control of the assets contributed to the trust. While this might involve making a taxable gift, this type of trust can be potentially advantageous from a tax perspective and for protecting assets from creditors. Note that testamentary trusts are generally irrevocable and cannot be changed except in very limited circumstances, such as a court amendment.

Consider trusts in your planning process

Keep in mind that trusts are not just for those with significant wealth. Anybody seeking to preserve assets for children or grandchildren, avoid the expense and delay of probate, maintain greater privacy about their estate or protect assets from creditors may want to explore the advantages trusts can offer. Trusts are complex and there are fees associated with setting them up. Consult an experienced financial advisor and an estate attorney to review your situation and consider whether a trust makes sense for your estate plan. 

Michael D. Lanuto, CRPC®, AWMA® is a Financial Advisor with S.M. Miller & Associates, a private wealth advisory practice of Ameriprise Financial Services, LLC. in Albany, NY.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 9 years. To contact him: 518-949-2039; 4 Atrium Drive, Ste 200, Albany, NY, 12205; Michael.Lanuto@ampf.com; https://www.ameripriseadvisors.com/michael.lanuto/lp/request-contact/3/. 

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