When it comes to a long-term plan for investing your money, a trust can be a very useful tool. By setting aside your assets, from cash to stocks to physical property like cars, artwork, or real estate, to be controlled by a third party on behalf of a beneficiary, you can save yourself a substantial tax bill, plan for your family’s future, and spare your descendants significant legal hassle after your death.
Why Use a Trust?
One of the most common uses of a trust is estate management. Assets placed in a trust and passed down to your descendants avoid probate court, the potentially time-consuming and contentious process of dividing an estate. Another reason is to set money aside — you can name yourself as the beneficiary of a trust and arrange it to be released to you in a few years.
Irrevocable vs. Revocable Trusts
All trusts are either revocable or irrevocable. A revocable trust can be changed or closed by you, the trustor, at any point. If you set money aside in the trust and later change your mind about how to allocate your assets, you can simply dissolve the trust and opt for another direction. You can also change the beneficiary, the terms of the trust, or remove some of the funds while leaving the trust in place.
The potential downside of a revocable trust is that the funds within it are accessible to your creditors. In the event of a drastic change in your financial situation, you might lose control of the money in your trust.
An irrevocable trust can’t be changed after it’s created. Once you’ve moved assets into the trust, those assets can’t be removed by anyone (including you) until the terms of the trust are fulfilled. Irrevocable trusts are often used to control the size of an estate and the beneficiaries of your life insurance policies after your death.
Fixed vs Discretionary Trusts
A fixed trust includes instructions when it’s set up for how the funds will be distributed. For example, you could leave $100,000 in a trust, but specify that it be released at a rate of $10,000 per year after your child turns 18. If you leave them stocks or real estate, you can include rules about whether and when those assets can be sold.
A discretionary trust is so named because it’s at the discretion of the beneficiary to do with the assets as they wish. You can leave documentation about what you hope the beneficiary does with the money — maybe you want to help your kids with their tuition or a down payment on a house — but you can’t legally mandate that they follow those instructions.
Asset Protection Trust
An asset protection trust is a type of irrevocable trust that returns the assets in the trust to the control of the trustor after a period of time. While the assets are in the trust, they can’t be accessed by creditors, which insulates the holder of the assets from losing their money to debts.
Asset protection trusts are often set up in countries outside the United States to add another layer of protection, but it’s not always necessary to transfer your assets to a foreign jurisdiction in order to establish the trust.
Special Needs Trust
If you intend to use your wealth to care for a parent or someone else who might not have the income to care for themselves, a special needs trust might be just what you need. The intention of a special needs trust is to supplement a person’s income without disqualifying them from government benefits like Social Security.
For example, if your parents are retiring and intend to claim Social Security, a large gift from you could render them ineligible to keep claiming benefits. If, instead of gifting them money, you put the funds in a trust to be paid out over time, you can avoid affecting their eligibility.
In order for this type of trust to be legal, it has to be a fixed trust — the beneficiary of the trust cannot have any control over the amount or frequency of the trust’s distributions, nor do they have the option to revoke the trust.
“Special needs” is defined as the requisites for maintaining the comfort and happiness of a disabled person when those needs are not being met by any other organization or agency. These might include medical and dental expenses, treatment, rehabilitation, transportation, dietary needs, discretionary income, vacations, and a long list of other items.
Tax Bypass Trust
Any person can leave their estate to their spouse in the event of their death without having to pay estate tax on those assets. However, when the second spouse dies, any assets over the exemption limit of $11.58 million per individual that are left to your children will be taxed at rates up to 40 percent.
A tax bypass trust or “A/B trust” is designed to avoid that estate tax. When one spouse dies, the entire estate is divided into two separate trusts. The first is a revocable trust (the marital trust) that belongs to the surviving spouse for them to do with as they please. The second is an irrevocable trust (the family trust) intended for the couple’s descendants. The surviving spouse can access that trust and gain income from it (like dividends from stocks), but they can’t spend, sell, or give away assets.
Since the surviving spouse doesn’t own the assets in the family trust, the assets in it aren’t counted in their estate when they die. By dividing your estate into two separate trusts like this, you may be able to keep the value of bequeathed assets near or below the $11.58 million mark, allowing your descendants to avoid millions in estate tax.
Charitable Trust
At First Western Financial, we know that your wealth is about more than just the number at the bottom of your balance sheet. Our ConnectView system incorporates financial, spiritual, experiential, and relational wealth to create a plan that truly reflects your values.
If philanthropy is a priority for you, you can set up one of two kinds of charitable trust: a charitable lead trust or a charitable remainder trust. With a charitable lead trust, you can earmark a certain amount of the assets in the trust to be given to specific charities in the event of your death. What’s left of your assets after those donations will be left to your beneficiaries.
A charitable remainder trust is structured the other way around — it allows you to receive income from your trust for a certain period of time, with what’s left going to your charitable organization of choice.
Life Insurance Trust
A life insurance trust is another way to help your heirs avoid estate taxes. Rather than naming your children as the beneficiaries of your life insurance policy, you’ll dictate that the policy be paid out into the trust. The trustee then manages the assets on behalf of your descendants.
Spendthrift Trust
If you’re in the somewhat uncomfortable position of being worried about your heirs spending their inheritance too quickly, a spendthrift trust is a useful solution. With such a trust, you can specify exactly how and when your beneficiaries can access the assets in the trust. For example, you could leave your beneficiaries a trust containing stocks and bonds, but dictate that they’re only allowed to access the dividends or interest, not the principal itself. You could also leave a house to your descendants, allowing them to live in it or rent it out, but not sell it.
Talk to the Professionals
There are other forms of trust that might be of use to your financial circumstances — generation-skipping trusts, testamentary trusts, and Totten trusts, among others — but they can be complicated to choose and set up.
At First Western Trust Bank, we’re committed to evaluating each client’s unique financial needs, goals, and values holistically through our comprehensive ConnectView system. We have nearly 20 years of experience in creating personalized, tailored financial plans for our clients. Set up an appointment to meet with us, and we’ll go over every aspect of your financial situation to help you decide whether a trust is the right solution for you.
