The other day when talking with a friend, I mentioned the possibility of using a trust to help him achieve some of his financial goals. “I’m definitely not rich enough to have a trust!” he immediately retorted. For the record, my friend is well-off by any measure.
This isn’t the first time I’ve encountered that reaction. Many highly educated clients and professionals have expressed the same preconceived notion that trusts are only for the extremely wealthy. For many, the term “trust” conjures images of a trust fund baby living off family money or billionaires looking to tax-efficiently pass their wealth to the next generation.
In reality, trusts have myriad uses beyond these stereotypes. A trust is simply a legal entity that is created by a person, the grantor, to hold assets on behalf of another party, the beneficiary, and is administered by an individual or organization, known as the trustee. This structure can be used in any number of ways to solve a host of financial planning issues.
Most advisors can add value to their practice by educating clients about the application of trusts and when they can be useful. Granted, before recommending the use of trusts, it is essential that the advisor first work with an experienced estate planning attorney as trusts are a nuanced area that requires specialized knowledge. But once that knowledge is gained, collaborations of this nature are a wonderful way to position your client to achieve certain financial objectives in the most optimal way.
Here are a few scenarios in which trusts can be used by families that are not necessarily in the top decile of wealth:
If an individual uses only a will to pass assets to their loved ones, it must go through probate court where it becomes public record. Any relative, friend, neighbor, or member of the public can look up the will once it has been filed in court. However, since a trust does not need to be filed in court, it can allow the deceased’s assets to pass in a more private manner in accordance with the trust’s directions.
Caring for minor children.
If a client has minor children, it is ill-advised to leave assets to them outright. That’s because in the event that the client dies prematurely, the court will appoint a guardian to manage the assets on behalf of the kids. There is no guarantee who the court will appoint as guardian and whether they will have the children’s best interests at heart.
A better way is to put those assets into trusts. The client will need to name an adult trustee to handle the assets until the child is old enough to inherit the funds. The trustee can be a person the family knows or a professional trustee they can rely on to follow the instructions left behind and make decisions that are in the best interests of the child.
Protecting irresponsible heirs.
Inherited funds are supposed to help with expenses, savings, or other prudent financial goals. Parents may fear their child is a spendthrift or not financially mature enough to handle a large sum of money, and will blow it on a single purchase like a sports car or a vacation home. In such a scenario, utilizing a trust for the funds can be immensely beneficial. The grantor can structure the trust so the child receives a monthly stipend or gets access to the funds at a certain age or upon the attainment of certain benchmarks, among many other possible arrangements.
Addressing modern family issues.
These days, it is increasingly common for families to be more diverse than in years past. One example is LGBTQ couples. Same-sex marriage is legal in every state as a result of the 2015 Supreme Court decision, giving married gay couples the same inheritance rights as heterosexual couples.
Despite broad acceptance of such relationships in mainstream America, gay couples still face discrimination. A legal right to inheritance doesn’t eliminate the possibility of a disgruntled family member challenging a will upon death. Utilizing a trust that leaves a spouse’s assets outright to an intended beneficiary minimizes the chance of a family member winning such a challenge. While a trust can technically be challenged, it is a much more difficult task than successfully contesting a will. One reason is because, as opposed to a will, an individual must actually move assets into a trust, which actively illustrates their intent.
Putting it all together.
Once the advisor and client have agreed upon the need for the trust and its general contours, the next step is to help the client locate a competent trusts and estates attorney to review their individual situation, determine an appropriate trust, and draft the document.
Then the attorney and advisor should work together to get the trust established and funded correctly. This last step is crucial—it’s amazing how many people go through the entire process only to never actually fund the trust. A team effort from all trusted professionals involved is required to ensure that the client is positioned to achieve their financial objectives and that nothing falls through the cracks.
As the wealth management business continues to evolve, it will become increasingly important for advisors to have more in-depth conversations with clients about their personal circumstances, wealth, and planning techniques. The inability for advisors to step outside their comfort zone on some of the less sexy issues, like trusts, will harm their practices. Conversely, embracing a more immersive and holistic approach positions the advisor as quarterback of a client’s financial affairs and will make their role more important than ever.
This article was written by Jonathan I. Shenkman and published in Barron’s on April 7, 2022.
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