Abstract: Trusts
can help affluent individuals and families manage, protect and grow their
wealth. But there are a wide variety to choose from, so it’s important to
understand the basic concepts behind trusts before choosing one. This article
defines trusts and provides an example of how one popular trust type works. A
sidebar looks at another example: intentionally defective grantor trusts.
Bolster
wealth management with trusts
Trusts
can be a useful tool for affluent individuals and families when it comes to wealth
management, protection and growth. But there are a wide variety to choose from,
so it’s important to clearly understand the benefits and limits of a trust
before choosing any one type.
What’s a trust?
A
trust is a legal document that dictates how an individual’s assets will be
managed for another person’s (or other people’s) benefit(s). There are usually
three parties to a trust: the grantor who creates the trust, the beneficiary
(or beneficiaries) who’ll benefit from the trust and the trustee(s) who’ll
manage the assets according to the trust’s terms and in the beneficiary’s best
interests.
All
trusts fall into one of two broad categories: living trusts and testamentary
trusts. Living trusts are set up during an individual’s lifetime to transfer
property to the trust. Testamentary trusts are established as part of an
individual’s will and take effect after he or she dies.
Living
trusts can be further categorized as revocable and irrevocable. With a revocable
trust, the grantor retains control of the trust’s assets and can revoke or
change its terms at any time. With an irrevocable trust, the grantor no longer
owns the assets and, thus, can’t make changes to the trust without the
beneficiary’s consent.
How can one protect you?
Individuals
looking to manage their wealth in a patient and prudent manner can achieve
various financial and estate planning goals from a trust, depending on its
type. For example, many affluent individuals, professionals and business owners
use a Delaware statutory trust to protect their assets from a loss resulting
from a legal judgment, such as malpractice or personal injury liability. A
Delaware trust also can be used instead of a prenuptial agreement by a spouse
to preserve his or her assets in case of a divorce.
When
establishing a Delaware trust, you transfer the assets you want to protect to
an irrevocable trust — these assets can include cash, business ownership
interests, real estate, and securities like stocks and bonds. These assets
generally will be protected from future creditors. Although you must give up
some control of the assets when you place them in the trust, you can retain
some powers, such as the right to direct the investment of trust assets and to
receive income and principal distributions from the trust.
Who can help?
There
are many other trust types to consider. The rules for establishing and
maintaining any trust can be complex, so please contact our firm for guidance.
Sidebar: A trust with a funny name
If
one of your professional advisors suggests creating a trust that’s
“intentionally defective,” you might consider hanging up the phone. However,
despite its funny name, an intentionally defective grantor trust is a completely
valid way to minimize gift and estate taxes when transferring certain assets,
such as an ownership interest in a closely held business, to the next
generation.
The
key is that contributions of ownership interest to the trust must be considered
gifts. This removes the assets and their future appreciation from your taxable
estate. The trust’s income is taxable to you, not your heirs. As a result,
trust assets can grow unencumbered by income taxes, which increases the amount
of wealth your heirs may receive upon your passing.