The Benefits of a Trust for Effective Wealth Management

Benefits of a Trust: Why Everyone Should Consider a Trust Strategy

Estimates suggest that an astounding $124 trillion of wealth will transfer between generations by 2048, a monumental shift that highlights the importance of effective wealth planning. While wills have long been a cornerstone of estate planning, a family trust is a more sophisticated and increasingly vital tool for managing and distributing wealth. Trusts aren't just for high-net-worth families; they can offer a range of benefits to families of all means, even modest ones. Here, we delve into the advantages of incorporating a trust into your financial planning, exploring its various forms, core benefits, and the essential role of professional guidance in navigating trusts.

What Is a Trust?

A trust is a legal arrangement in which a "grantor" (the creator of the trust) transfers assets to a "trustee" (the manager of the trust) for the benefit of "beneficiaries." It's a simple structure, but it can unlock a powerful degree of control, flexibility, and protection for your assets, both during your lifetime and after your passing.

Unlike a will, which primarily dictates the distribution of assets upon death, a trust can be active during your lifetime. It can act as a tool to manage finances, shelter assets from taxation and debt collection, and facilitate a more seamless transfer of wealth to heirs.

Differences Between a Trust and a Will

Both trusts and wills may be integral to estate planning, but they function in very different ways. A will primarily serves as a directive for asset distribution after death, requiring validation through a court process known as probate. This process can be lengthy, public, and costly. And it often delays when beneficiaries can actually access assets.

The assets within a trust are exempt from probate. This means a faster, more private, and often less expensive transfer of wealth to beneficiaries. Moreover, whereas a will becomes effective only upon your death, a living trust can provide for the continuous management of your assets during your life. For instance, if you become incapacitated, the trustee can still ensure that you and your beneficiaries are financially taken care of in accordance with your wishes, without the need for court intervention, such as a guardianship or conservatorship.

Core Benefits of a Trust

Trusts offer a foundational set of advantages that make them a compelling component of comprehensive wealth planning for nearly everyone.

Avoiding Probate & Maintaining Privacy

One of the most compelling advantages of a trust is its ability to bypass the expensive and public probate process. Assets in a trust are distributed directly by the trustee to beneficiaries according to the trust's terms. The court is never involved. This avoids the delays, legal fees, and administrative costs associated with probate, which can often tie up assets for months or even years.

Furthermore, once submitted to probate, a will becomes a public record, detailing your assets, beneficiaries, and distribution plans. This can lead to a concerning lack of privacy. A trust, by contrast, is a completely private document. Any details regarding your wealth, beneficiaries, and distribution terms will remain confidential. The elevated level of privacy can be particularly valuable for high-net-worth individuals or families seeking to keep their financial affairs private.

Tax Benefits

Trust taxation can be complex and depends on the type of trust and its terms. Generally, trusts are categorized as either "grantor trusts" or "non-grantor trusts" for income tax purposes.

Grantor Trusts: In a grantor trust (which includes most revocable trusts), the grantor is considered the owner of the trust's assets for income tax purposes. This means all income, deductions, and credits generated by the trust's assets are reported on the grantor's personal income tax return (Form 1040).

Non-Grantor Trusts: For non-grantor trusts (most irrevocable trusts), the trust is considered a separate taxable entity. It must obtain its own Taxpayer Identification Number and file an annual income tax return (Form 1041). The trust pays income tax on any undistributed income at specific trust tax rates. If the trust distributes income to its beneficiaries, that income is generally taxable to the beneficiaries, and the trust may receive a deduction.

Grantor trusts may offer some limited direct tax benefits, but irrevocable trusts may contribute to sophisticated tax planning. As noted before, assets transferred into an irrevocable trust are typically removed from the grantor's taxable estate. This can significantly reduce tax liability and is a major advantage for large estates, as well as a valuable planning tool for smaller ones.

Certain types of irrevocable trusts can also provide additional tax benefits, especially for philanthropic individuals. For instance, charitable remainder trusts enable individuals to make significant philanthropic contributions while potentially reducing income, gift, and estate taxes. They may even provide an income stream to the grantor or other beneficiaries.

Control Over Wealth Distribution

By 2048, more than $100 trillion will be transferred from Baby Boomers to Generation X and Millennial heirs. With so much money at stake, the ability of a trust to give you control over how your wealth is distributed and managed is crucial not just immediately after your passing, but for generations to come.

A will provides just a small picture of your wishes at the end of your life, but a trust allows you to adapt to changing circumstances. A trust strategy can play a pivotal role in ensuring that your wealth is transferred effectively and according to your long-term vision.

There are several ways that trusts give you powerful control over wealth distribution:

• Instead of outright distributing assets to beneficiaries, you can set conditions for when and how they receive assets. For example, you could stipulate that your grandchild receives a certain amount at specific ages, such as 20% of the account at age 18, another 20% at age 21, and so on. You could make it even more specific, so they receive an amount upon graduating from college, getting their first job, or meeting other milestones.
• Certain special trusts may offer unique planning abilities. For instance, a special needs trust can be established to provide financial support for a loved one with disabilities without jeopardizing their eligibility for government benefits.
• Assets in irrevocable trusts are often protected from creditors or divorce settlements. This can protect assets to ensure they're passed on to loved ones upon your death. Assets held in certain types of irrevocable trusts can be protected from a beneficiary's creditors or from being divided in a divorce settlement.
• Trusts can be structured to support charitable causes for generations after you're gone, creating a lasting legacy that extends beyond your lifetime.

This level of control can help ensure that your legacy is preserved and your wealth is used wisely, in alignment with your values and your wishes for providing long-term support for your loved ones. About 89% of firms surveyed by Cerulli's High-Net-Worth and Ultra-High-Net-Worth Markets in the U.S. 2024 report say that regular communication and family meetings support more effective wealth transfer, so it's never too soon to begin discussing how a trust could fit into your financial and estate plan.

Protects Assets

One of the key benefits of many trust strategies, especially those involving irrevocable trusts, is asset protection. We've touched on it a couple of times now. Still, it's essential to reiterate that once assets are legally transferred into an irrevocable trust, they're no longer owned by the grantor, which means they cannot be attributed to their personal wealth. That makes them generally off-limits for creditors, litigants, and even many governmental claims. This can be extremely valuable protection for several types of people, including:

• People in high-risk professions: Doctors, lawyers, and other professionals in fields prone to lawsuits, can shield their personal assets from professional liability claims.
• Entrepreneurs and business owners: A trust can safeguard personal wealth from business risks, ensuring that business failures do not lead to the loss of family assets.
• People facing future claims: A trust cannot be used to defraud existing creditors, but it can protect assets from debt collectors and other claims that arise after the trust has been established.
• People planning for long-term care: Irrevocable trusts can help individuals qualify for government benefits, such as Medicaid, by reducing their countable assets.

Many individuals whose primary goal is to protect assets set up an asset protection trust (APT). These trusts are often established in jurisdictions with favorable asset protection laws before any potential claims can arise. But it's crucial to understand that asset protection trusts are complex legal instruments. Their effectiveness depends heavily on proper structuring, timely funding, and compliance with all relevant state and federal laws. This is a major reason why it's essential to work with an experienced corporate trustee and trust administration partner, like Arden Trust, when establishing your trust.

Support During Illness or Disability

One of the most important benefits of trusts is frequently overlooked. Trusts may provide seamless support of your financial affairs if you become incapacitated due to illness, disability, or advancing age.

If you become unable to manage your finances on your own, your loved ones may have to petition a court to appoint a guardian or conservator over your assets. Going to court is public, often expensive, and can be both time-consuming and emotionally draining for your family. Not to mention, it could lead to interfamilial conflict.

A living trust can anticipate this possibility by designating a successor trustee (or trustees) to manage your assets according to specific instructions if you ever become incapacitated. This can reduce stress on your family by outlining clear directives for your care and the use of your assets when you are unable to make decisions for yourself. It will ensure that your wealth is distributed in accordance with your wishes.

With proactive planning from a partner like Arden Trust, you can gain peace of mind knowing that your financial affairs will be handled expertly and compassionately, according to your wishes, even if you are unable to express them yourself.

The Role of a Corporate Trustee

While the benefits of trusts are clear, the effective administration of a trust, particularly over the long term, requires specialized knowledge, impartiality, and diligence. That's where the role of a corporate trustee becomes incredibly important. You may name a family member as a trustee, but they might lack the necessary expertise, time, or objectivity to properly manage the trust, especially if it's complex, involves significant assets, or spans multiple generations.

An impartial, fiduciary, and experienced corporate trustee can provide the following advantages:

• Expertise in fiduciary duties, ensuring strict adherence to legal and ethical standards in managing and distributing trust assets
• Professional investment management services that can help ensure trust assets are invested wisely based on the trust's objectives and risk tolerance
• Impartial, objective trust management that is free from family biases or emotional entanglements that can complicate administration and lead to disputes among beneficiaries
• Efficient record-keeping, tax filings, distributions, and compliance, relieving beneficiaries of administrative tasks
• Continuous, uninterrupted service for the life of the trust, potentially across many decades, rather than individual trustees who may pass away, become incapacitated, or lose interest
• Impartial conflict resolution to mediate and help resolve conflicts in a fair and equitable manner
• Understanding of complex trust laws, tax regulations, and investment strategies, ensuring the trust remains compliant and optimized

Arden Trust has been a trusted corporate trustee for decades, assisting both financial advisors and their clients with comprehensive, impartial, and experienced trust administration services. As a fiduciary, Arden Trust works collaboratively with financial advisors, attorneys, and clients to ensure that trust strategies are not only meticulously implemented and administered but also deliver on the grantor's intentions to secure their heirs’ financial stability for generations to come.

We're in the midst of the greatest generational wealth transfer in history. A trust strategy can be a pivotal step in securing your legacy and ensuring your wishes are honored. Whether you want to avoid probate, minimize your taxable estate, protect assets, or ensure a more seamless distribution of your assets to beneficiaries, you don't have to be a high-net-worth individual to reap the benefits of a trust.

If you're ready to explore how a trust strategy can benefit you and your family, seek expert guidance from a team of experienced trust professionals to navigate the intricacies of trust law and determine the most suitable structure for your needs. Contact Arden Trust today to schedule a consultation and discuss how we can support your long-term financial planning goals.