Avoiding Probate, Minimizing Estate Taxes and Giving the Grantor Control

Key Takeaways:
  • Trusts help preserve family wealth by avoiding probate, protecting privacy and giving you more control over how assets are distributed.
  • The right trust structure can reduce estate taxes and help safeguard assets from poor financial decisions, divorce or business challenges.
  • A trust only works as intended when it is properly funded by transferring assets and beneficiary designations into the trust.

 

A key step in estate planning is exploring whether to employ a trust to pass assets onto beneficiaries, or simply leave a will. A will works, but does a trust work better? To answer the question of How Do Trusts Protect Family Wealth, a little context may be helpful for those who have not had to navigate through these issues already.

Differences Between a Will and a Trust

Wills and trusts often accomplish similar ends, but there are key differences:

  • A will is written to determine distribution of assets after a person’s death, and it takes effect after the death occurs.
  • A trust can provide additional flexibility in determining how your assets are managed during your remaining lifetime and then distributed after your death. In certain cases, estate planning professionals advise clients to utilize both a will and a trust, with the will being placed inside of the trust.

One of the most significant differences between a will and a trust is that a will is a public document that is processed through a probate court after a person’s death. This may make some people uneasy. Aside from the contents of the will becoming part of the public record, the probate process can be lengthy and delay the distribution of assets for many months.

A trust, on the other hand, is private, as is a will that is placed within a trust.

More importantly, a trust can help protect family wealth for future generations, depending on how it is structured.

How Does a Trust Protect Family Wealth?

A trust can be more than a document that delineates the distribution of assets after the owner’s death. It can protect the value of the inheritance and promote the growth of assets in many ways. For example:

  • An irrevocable “spendthrift trust” can allow the grantor to determine how and when assets are distributed after their death. If a person dies while their children are still young — say, high school or college age — the assets may be spent unwisely by immature beneficiaries who don’t yet understand how to manage a large amount of money. A spendthrift trust allows you to determine how and when funds are paid out. Perhaps your beneficiaries will receive one-third of their inheritance at age 25, another third at age 35 and the final third at age 45. The spendthrift trust can preserve family wealth and give it time to grow by protecting the assets from poor spending choices, divorce or business downturns, while still ensuring support for the beneficiaries.
  • A “bypass trust,” which is irrevocable, can help a married couple with a large estate avoid estate taxes. This works by transferring assets to the bypass trust upon one spouse’s death. The bypass trust’s beneficiary is a third party, such as the couple’s child or children, though the surviving spouse can still benefit from the assets.
  • An irrevocable “generation skipping trust” helps preserve family wealth by transferring assets directly to grandchildren or later heirs, bypassing children in order to minimize estate taxes. This strategy is primarily helpful for families with substantial multi-generational wealth.
  • A “Spousal Lifetime Access Trust” (SLAT) is an irrevocable trust designed for high-net-worth married couples who want to remove significant wealth from their taxable estates while still preserving indirect access to those assets during their lifetimes. At its core, a SLAT allows one spouse (the grantor) to make a completed gift into a trust for the benefit of the other spouse (the beneficiary spouse), shifting both the transferred assets and all future appreciation outside the couple’s combined taxable estate.

Many different kinds of trusts can achieve the wealth preservation goals of high-net-worth families. It’s essential to discuss your goals with your wealth advisor to make sure the right trust structure is selected for you.

How is a Trust Established?

Think of a trust and the assets you intend to put into the trust as separate issues or entities — because they are.

A trust agreement is a contract between at least two parties, a “trustor” (or sometimes called a “grantor”) and a “trustee.” So creating a trust entails putting the trustor’s (owner’s or owners’) wishes into a written document.

Typically, you would work with an attorney or an estate planner to create the legal document establishing the trust. This will involve drafting the trust so it works as you want, naming a trustee and contingent trustees (who would execute the trust if the initial trustee were to die), signing the document in the presence of witnesses, and having it notarized.

So you have accomplished the first step, that being to create a trust. Now you have to define the various beneficial interests. Who do you want to name as beneficiaries of the assets within the trust? Presumably, you want yourself and your spouse, if you’re married, to enjoy the benefit of those assets while you are living. Then, who do you want those benefits to pass to once the original owner or owners die?

Finally, you must fund your trust with the assets you intend to be covered by the trust. This means listing each asset clearly in the trust, and — importantly — changing the titles on your assets and accounts from your name to the trust’s name.

This is why it’s important to think of the trust and the assets as separate entities. When you die, if you leave a trust that lists your house and financial accounts, but the house and the financial accounts have not been properly re-titled to fund that trust, you effectively have no trust that will avoid the probate proceeding.

By having the assets legitimately titled in the name of your trust, and having all of your life insurance policies and retirement assets designate your trust as the primary beneficiary, those assets are part of the trust and are not includable in your probate estate. Any and all assets that are not re-titled into the name of your trust will remain as part of your probate estate.

Summary

Your legal counsel will probably advise you to both create and fund a living or revocable trust and execute a Last Will & Testament that he or she might call a “pour over will,” and we would generally agree with that advice. Having your will admitted to probate, even if all of the assets you know about are funded into your trust, and all your beneficiary designations for your life insurance and retirement portfolios appropriately name your trust as their beneficiary, is most suitable for at least two reasons:

1)    The proceeds of a wrongful death claim could never be part of your trust — that court award or settlement amount was not in existence during your life; and,

2)    The probate process is the best if not only way for any potential (if unknown) claimants to be legally estopped for all time.

The above pour-over will would simply do what the name implies: any and all assets you did not know about or forgot about when funding your trust, and were therefore part of your probate estate, will be “poured over” into your trust after any legal fees, court costs, etc. Therefore, it too can help Protect Your Family Wealth for Future Generations.

Questions?

Trusts are powerful tools for enabling families to preserve wealth for future generations. Trusts protect your wealth by shielding it from the probate process, by minimizing or avoiding estate tax, and by allowing you to have some control or influence over how your wealth is managed and distributed to your heirs and legacy interests after you die.

But trusts can be complex, and it is essential to work with a team including a wealth consultant, a tax advisor and your attorney to ensure that the documents are drafted correctly and all assets included in the trust are re-titled.

Contact an Adams Brown advisor to discuss trust planning and whether it may be the right vehicle to anchor your estate plan.