Generation after generation, American families have been using trusts to transfer their wealth and preserve their legacies. Unfortunately, trusts continue to suffer from the common misconception that their sole purpose is to reduce tax liabilities. In fact, the association between trusts and taxes is so strong that President Trump’s promise to repeal the federal estate tax has prompted some families to ask: If the estate tax goes away, will we still need trusts?
The short answer is yes. While it’s true that irrevocable trusts can help shelter assets from estate taxes, they also offer a long list of non-tax-related benefits. Revocable trusts, which have never provided tax advantages, also offer compelling features.
Below are 10 reasons we believe trusts will still matter in 2017 and beyond, regardless of what happens to the federal estate tax.
If you become seriously ill or incapacitated, a fully-funded revocable trust (sometimes called a Living Trust) can provide for the efficient management of your finances without the cost and delay of a conservator or guardianship proceeding. A living trust may also help avoid the complications that can arise when someone acts as your agent under a power of attorney: many financial institutions are reluctant to recognize power of attorney documents that are created by other firms. A living trust agreement typically provides your successor trustee with discretion to pay all reasonable living expenses, including in-home medical care. If you are married, the trust agreement will also allow for distributions to support your spouse.
Without a trust, your financial assets will be frozen until your will has been submitted to the court and an executor is appointed. This may cause cash-flow problems for your spouse or beneficiaries if they need to access those accounts to pay funeral expenses, medical bills and other related costs. Unlike assets held in your individual name, assets held in a living trust can be available immediately to pay estate taxes, administration expenses and debts without waiting for the court’s approval. Even if funds aren’t needed, knowing they are available can provide a good deal of comfort to family members at a difficult time.
The process of having the court handle the administration of your estate can be time-consuming and expensive (although its costs and inefficiencies are sometimes exaggerated). If you own real property in more than one state, it may be necessary to open probate in multiple jurisdictions. In contrast, assets held in a living trust are not subject to court supervision and probate is not required to transfer them to your beneficiaries. That’s not to say that no legwork is required—you must transfer assets to the trust during your lifetime and there is a process that must be followed when administering a trust. But administering a revocable trust can still be much less cumbersome than administering assets through a probate proceeding.
If privacy is a concern for you and your family, a living trust could be beneficial. While the terms of a will become public information during the probate process, the terms of a trust remain completely private. In addition, certain jurisdictions allow for the creation of “quiet” irrevocable trusts, which allow you to leave assets to beneficiaries without notifying them immediately. When the trust is created, you specify exactly when each beneficiary should be notified. Quiet irrevocable trusts can be created either during your lifetime or at the time of death.
Control has always been a primary reason for establishing a trust. As the person who creates the trust, you determine how it is structured, the timing and purpose of distributions, and how the assets are managed. You can create a trust for a single beneficiary or several beneficiaries, including charities, individuals and multiple generations of family members. The trust might require the payment of all income to a particular beneficiary, limit the use of principal distributions to educational or medical purposes, or trigger distributions based on age. You decide exactly how your assets will be distributed rather than leaving the decision up to a beneficiary.
Divorces, multiple marriages and blended families present challenges for individuals who want to make sure their wealth truly stays within the family. By leaving property in trust, including trusts for your spouse, you can ensure that your wealth ultimately passes along to your children or whoever you include in your definition of family. Trusts become especially important in the event of divorce because assets held in an irrevocable trust are generally shielded from creditors.
In our increasingly litigious society, asset protection has become a pressing concern. Families with considerable wealth can be especially vulnerable because they are perceived as having the financial means and motivation to settle out of court, especially when faced with claims that are scurrilous and might be made public. Beneficiaries who work in certain high-liability professions (such as doctors and lawyers) also face the threat of malpractice lawsuits. Properly structured irrevocable trusts can protect your beneficiaries from the claims of future creditors.
Approximately 15% of all children under the age of 18 in the US have special healthcare needs, according to the US Department of Health and Human Services. A well-crafted trust can include provisions for the long-term care of these beneficiaries, even if their medical needs have not yet been identified. For example, your trust could be written with enough flexibility to provide special accommodations for an adult child who becomes disabled, or a grandchild (or a future grandchild) diagnosed with a serious, long-term disability.
Transferring ownership of real estate or other unique assets to a trust can ensure that the property is maintained properly over the long term. A trust can also be useful when you want to divide beneficial ownership of a vacation home or some other piece of property that you want to keep in the family.
Last but not least, a professional trustee can help ease the many burdens that otherwise fall on the shoulders of family members or other trusted individuals. While you are living, professional management may help prevent you from becoming a victim of elder abuse. A professional trustee can also be responsible for communicating with your beneficiaries, handling conversations that might be difficult for you personally or for your family. Professionally managed trusts can offer the convenience of professional record-keeping and administrative services as well as the skills of professional investment managers. When you work with a trusted partner all of these services can continue without interruption, generation after generation.
Note: This discussion focuses on the potential benefits of trusts, but please keep in mind that estate planning is a complicated practice. The pros and cons of creating a revocable or irrevocable trust are influenced by a wide variety of factors, including the specific type of trust you are considering, the costs of establishing and maintaining the trust, and your family’s unique financial profile. If you have any questions about the federal estate tax or your family’s estate plan please don’t hesitate to contact your Fiduciary Trust representative.