TRUST & ESTATE PLANNING

The Non-Tax Benefits of Gifts in Trust

Strategies to help structure a trust efficiently

08.21.2019 - Gerard F. Joyce

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There is a misconception that trusts are useful only for saving taxes or for protecting minors or spendthrifts. On the contrary, leaving property in trust rather than outright can provide significant non-tax benefits for all beneficiaries, including surviving spouses and adult or minor children.

General Benefits

The tax benefits of trusts are widely recognized. Gifts in trust, however, also have many non-tax advantages over outright gifts:

Protection from Claims of Creditors

Assets held in trust are generally protected from the claims of the beneficiary’s creditors. The value of this protection has increased in today’s litigious climate. Lawyers, doctors, architects, corporate directors, and other professionals and executives worry about exposing their assets to claims of litigants. Many individuals seek to protect their assets from future creditors by engaging in complex, costly and risky strategies. By leaving assets in trust, rather than outright, you accomplish this objective for your beneficiaries in a simple, cost-effective and safe manner.

Protection from Claims of Spouses

If a beneficiary divorces his or her spouse, a divorce court has the ability to divide property between them. Assets inherited outright by an individual would ordinarily not be subject to division by the court; however, if that inheritance is commingled with other joint or “marital” assets, it might be subject to equitable division. By placing the inheritance in trust, you increase the probability that it will not be subject to division by a divorce court.

Additionally, most states grant your beneficiary’s surviving spouse an automatic right to take property from your beneficiary’s estate, even if your beneficiary has intentionally disinherited that spouse. If you leave property in trust, however, the surviving spouse generally has no right to the property when your beneficiary dies. You can provide your beneficiary with the ability to benefit his or her spouse, without giving the spouse any automatic rights to that property.

Keeping Funds in the Family

You have the ability to select the ultimate recipients of property left in trust after your beneficiary’s death. This may be your desire, especially if your beneficiary has no spouse or descendants and you wish for other members of your family or charity to benefit from the property. 

Continuity and Expedience in the Event of Disability or Death 

Assets held in trust can continue to be managed without interruption should your beneficiary become disabled or when he or she dies. This may not be the case for property owned outright by your beneficiary. Upon becoming disabled, an expensive, lengthy and potentially embarrassing court proceeding is generally required to appoint a guardian to manage the property owned outright, unless your beneficiary has given a power of attorney to an individual. After a guardian has been named, continued court supervision over the management of investments and disbursements is usually required.

At your beneficiary’s death, the probate process may cause delay in the personal representative’s ability to collect, manage and distribute the property owned outright. Assets in trust are available immediately to pay debts, estate taxes and other obligations. There is also continuity of professional management when assets are held in trust.

State Income Tax Benefits

Through careful planning, a trust may not be required to pay state and local income taxes on accumulated income and capital gains.

Professional Management

Funds held in trust are more likely to be professionally managed, especially if a trust company is appointed trustee or co-trustee. Trust assets are also protected from anyone exerting undue pressure on your beneficiary for investment capital or charitable contributions.

Benefits Specific to Spouses

Bequests in trust for spouses have two main advantages:

Protecting Intended Beneficiaries

You may have a clear idea as to whom you would like to receive your estate after your surviving spouse’s death. If you leave that bequest in trust, your intended beneficiaries will receive the property. This is important if your current spouse is not the parent of your ultimate beneficiaries. It is also important if your surviving spouse remarries. As described previously, a new spouse would otherwise have rights in the property that your surviving spouse owns outright.

Flexible Post-Mortem Tax Planning

A marital bequest in trust affords the most flexibility for estate tax planning.

Benefits for Minors

Many individuals make annual gifts to minor children under their state’s Uniform Transfers to Minors Act (“UTMA”). Making those gifts in trust provides the following additional advantages over UTMA gifts:

Control

Custodial gifts become subject to your beneficiary’s control upon his or her reaching age 18 (an age which is quite young). Gifts to a properly structured trust may be left in trust beyond age 18.

Control in the Event of Death

If your minor beneficiary dies, the gifted assets would by law pass back up to the minor’s parents—one-half to the mother and one-half to the father. This is true regardless of who made the gifts. This result may not be desirable, not only because it defeats the estate and gift tax reasons for making the gifts, but also because the parents may no longer be married to each other at the time of the child’s death. By gifting assets to a trust, you can instead direct that your minor beneficiary’s siblings receive the property at the beneficiary’s death.

Trusts Are Not as Expensive and Inflexible as You Might Think

In spite of the above advantages, some individuals are reluctant to create trusts for competent, adult beneficiaries unless there is a significant tax benefit to doing so. They cite cost and inflexible provisions as two factors weighing against using a trust.

We believe that the costs to create and manage a trust are minimal compared to the benefits derived from a trust. In fact, at Fiduciary Trust Company International, there is no added fee if, in addition to providing investment management, we act as a trustee for the client’s assets.

Flexibility

Trusts need not be—nor should they be—inflexible. Trusts are most powerful when they give the trustee the latitude to adapt to current circumstances, thereby allowing the trustee to carry out the grantor’s wishes most efficiently and effectively. The key to ensuring flexibility lies in the drafting of the trust. Trust provisions should be flexibly drafted so that the beneficiary can receive maximum enjoyment from the trust property without destroying the trust’s protective qualities. One method of creating flexibility is to give certain powers to the beneficiary. For example, the beneficiary can be given any one or more of the following rights:

  • to demand a withdrawal each year from the trust of an amount equal to the greater of $5,000 or 5%;
  • to demand that trust principal be paid to his or her own spouse or children;
  • to dispose of the trust property under his or her will; and
  • to remove a trustee and designate successors.

All of these powers give your beneficiary a degree of control over trust property. If carefully worded, the beneficiary will not destroy the trust’s benefits. In addition, these provisions allow a financially sophisticated trustee to adapt the trust’s investment strategy to changing circumstances in the markets or in the beneficiary’s life.

In Summary

Trusts can be much more than vehicles to protect a spendthrift beneficiary or to save taxes. Trusts can be powerful estate planning tools to provide for surviving spouses, adult or minor children, and other beneficiaries.  


This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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