How to Use a Trust as a Financial Planning Tool

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By Sarah Duey

Clients frequently ask whether they should leave their assets in a trust. It depends. Of course, if your net worth exceeds $11 million, putting your assets in specific types of trusts can be helpful for federal estate tax issues. However, 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 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 scenarios that might call for a trust. 

Benefits of a Trust

Protecting Assets Against Lawsuits

We all know that America is a litigious society. If your child inherits your assets outright at your death, they are subject to creditors, divorce and lawsuits. Leaving the assets in a trust can help protect your child’s inheritance against these potential losses. 

Imagine if your child, after just receiving his inheritance from you, hits a bus full of lawyers. The child’s trust would be protected against legal judgments.

Protecting Assets For “Spendthrift” Children

What if your child has CBD – Compulsive Buying Disorder? In other words, your child is 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 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 financial planning work together for a healthy future for your child. 

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 alcohol or drug addiction. Or, perhaps your child will be challenged in managing their own assets because of lack of time and/or ability. Again, a trust helps with these situations in managing the assets over their lifetime.

Or what if you die when your daughter is unmarried, and she has minor children – no prince charming can marry her and take her 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 her marital estate could be part of the division of property. Instead, if you leave your assets in trust for your child at your death, and, 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 if you are in a same-sex relationship or cohabitating with your partner. 

If you are a same-sex couple or unmarried couple, you have 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. A 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

Trusts can be one of the most powerful vehicles for settling your affairs, taking care of your loved ones and carrying on your wishes, especially when you have a blended family. 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 are charitably inclined you might also want to consider establishing a charitable remainder trust, which allows you, as the grantor, and possibly your spouse and children, to receive an annual payment from the trust during their lifetime, with the balance going to a charity or donor-advised fund when the trust terminates. 

You may also receive an income tax charitable deduction based on what the charity will receive when you contribute your assets to the trust. Charitably-focused trusts, such as charitable remainder trusts, can be a great tool to handle distributions from qualified plans, as well. This is especially crucial with the recent passage of the SECURE ACT if you do not want your IRA, for example, to pass directly to a child as a beneficiary. 

Negating a Probate

If you had an experienced estate planning attorney draft your trust and properly funded the trust by titling your assets in your trust, then your beneficiaries might avoid the court-supervised process of settling your affairs, or probate, altogether.

Probate is a hassle in many states. People like the idea of avoiding probate for the sake of privacy and efficiency. By and large, probate adds cost and time to the process of settling your affairs. Not to mention, it is 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 are 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 after you die – for you and your loved ones.

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 for you and your family. 

Let’s talk!