Americans are living longer than ever, which means it’s more important than ever to plan ahead for your financial future and to efficiently ensure the transfer of wealth to future generations.
According to the Stanford Center on Longevity and The Longevity Project, Americans are living approximately 30 years longer, on average, than they did a century ago. In addition, adults who are 50 and older currently represent 35% of the nation’s total population and account for 83% of U.S. household wealth and 50% of U.S. consumer spending.
One effective way to protect your assets during your retirement years and to ensure that your wishes are carried out over time is to establish a trust, which is a legal arrangement wherein property and assets are held, managed, and invested by a third party for the benefit of one or more beneficiaries. A trust offers a much higher level of protection during life than relying on a power of attorney and makes sure that your assets are invested strategically, planning for future income and growth.
One of the benefits of a trust is that it can potentially “lock up” your financial assets, so creditors cannot access the money. A trust can also help to minimize estate taxes and help your loved ones avoid the costly and cumbersome probate court process, seamlessly transferring your assets to your heirs upon your passing. A trust appoints a designated individual, known as a trustee, who can manage your money, invest it wisely, and oversee expenditures. Ongoing professional management of the trust assets can be a significant benefit for beneficiaries as well.
Trust planning can help to protect your family relationships, minimizing fights over money. It can be extremely difficult to break a trust, so this approach works well to ensure that your wishes will be honored and that your assets will be managed and allocated in accordance with your values.
There are many different types of trusts available for high-net worth individuals in the U.S. Before setting up a trust, it’s important to understand the main options and to select the type of trust that will work best for you and your family.
Trusts can accomplish a wide range of goals, so the type of trust you set up will depend on what you are ultimately trying to achieve. Here’s an overview of some of the most popular types of trusts:
Revocable Trust – A revocable trust (also called a Living Trust) allows you to retain ownership and control of the property in the trust and make changes to the terms, including designating trustees and beneficiaries. Unlike a will, which becomes active only upon death, a revocable trust can handle your affairs once executed and funded, and will continue even if you become physically and/or mentally incapacitated. A revocable trust will automatically become an irrevocable trust upon the death of the grantor.
Irrevocable Trust - An irrevocable trust has more stringent rules than a revocable trust and cannot be changed, amended, or revoked. Once assets are transferred into an irrevocable trust, the grantor forfeits direct ownership of those assets, and those assets may be removed from the taxable estate. One of the benefits of setting up an irrevocable trust is that it can be used as a vehicle for advanced tax planning or gifting.
Spendthrift Trust – A spendthrift trust can be a smart tool for those who want to make sure that their loved ones will be taken care of, without the risk of having their inheritance squandered. With a spendthrift trust, funds are disbursed incrementally over time, subject to the Trustee’s discretion, rather than allowing beneficiaries access to their complete inheritance all at once. Assets held in a spendthrift trust belong to the trust, not to the beneficiary, which means that the beneficiary’s creditors cannot pursue inherited funds that are held in the trust.
Special Needs Trust – A special needs trust is ideal for making long-term provisions for family members who are physically or mentally disabled. However, this type of trust may also be helpful if you have a loved one who is struggling with addiction, is fundamentally irresponsible, or is on disability and wants to protect government benefits like Social Security disability or Medicaid.
Dynasty Trust - If you’d like to preserve your wealth for your children, grandchildren, and great-grandchildren, it might also be wise to consider a dynasty trust, which is designed to provide benefits for future generations by preserving the principal. A dynasty trust is a type of irrevocable trust that can be transferable to subsequent generations or you can limit its distribution to the first or second generation. The choice is up to you.
Selecting a trustee is a decision that requires planning, strategy, and foresight. When designating a trustee, make sure the person has a strong attention to detail, a solid understanding of and commitment to the required duties, an understanding of finances and investing, good communication skills, and like-minded values.
Transparency is also important. Some people prefer to appoint a family member or a friend as a trustee, but those individuals may or may not be qualified to appropriately invest assets. The trustee must be able to provide beneficiaries with proper reporting; to efficiently and accurately oversee tax return preparation; and to pay bills from the trust. Non-professionals may find it difficult to handle these responsibilities, so it may be beneficial to engage an objective professional who can keep the best interests of the beneficiaries in mind.
The time to set up a trust is when you’re healthy, strong, and clear-minded. Remember that an estate attorney should always be part of the process, making sure that your trust is set up in full compliance with all state and federal laws.
Likewise, bringing your financial advisor into the trust drafting stage will be beneficial to help you achieve your goals and to ensure that future generations will benefit from your generosity, in accordance with your wishes.
Do you need help determining if a trust makes good sense for you and your family? Please reach out to us to get started. We’re happy to help.