How a Trust Protects Your Assets and Loved Ones

Many retirees spend a lifetime building successful businesses or accumulating wealth and have an expectation for their families to benefit from their years of hard work. These people want to preserve their wealth in a way that is consistent with their values and provides measurable benefits to their family. This is where a trust comes into play.

Not Just for the Wealthy

You've no doubt heard the term "trust fund." Somehow, this term has become associated with only the uber-wealthy—conjuring images of expensive yachts and irresponsible, spoiled offspring. There is far more to trust funds than that, though. For many people with a wide range of incomes, a trust fund can be an effective and strategic estate planning tool.

A trust, or the creation of a trust fund, is simply a vehicle to transfer assets. It's especially useful for people with children who are still minors or for those who would like some of their assets to go to their beneficiaries without the hassle of probate. A properly structured trust can protect a person’s assets from creditors, prevent excessive taxation, segregate the family business from relationship foibles, and ensure that their wealth is preserved in a way that aligns with their values. These ideals are by no means exclusive to the “one-percent.”

What to Expect

When establishing a trust, you should be approached with the understanding that your situation is unique. There will be variables in the amount of financial resources you have accumulated, the types of assets you own, the amount you intend to part with, and your values and aspirations for your family members. The process begins with a lot of questions: about you, your life’s work, your philosophy towards wealth, and your estate planning goals. Also expect to discuss specific parameters for how your wealth should benefit others after you’re gone.  

After those desires are understood, the pros and cons of different scenarios are analyzed providing you with the information you need to make an informed decision. That information is then translated into a strategy and executed per your wishes.

An Abundance of Options

Because there are so many unique situations and objectives, there are many different types of trusts that can be set up according to your needs. The first junction is understanding the difference between a revocable and an irrevocable trust. Essentially, revocable trusts allow you to retain control of all the assets in the trust, and you are free to change the terms of the trust at any time. With irrevocable trusts, the assets in the trust are no longer yours, and typically you can't make changes, but the appreciated assets in the trust aren't subject to estate taxes.

  • Revocable Living Trusts:  A revocable living trust is a legal document designed to protect both you and your assets. A trust allows you to direct a trustee to manage and distribute your assets the way you decide is right for you and your family. With a properly funded trust, your estate would not have to go through probate and your finances will not become a matter of public record. 
  • Irrevocable Trusts: An irrevocable trust is designed to prevent alteration and dissolution once it has been created – the beneficiaries, assets, and terms are inflexible and completely final. Once you relinquish control, the assets and property (including any appreciation) is no longer part of your taxable estate. However, some states (such as South Dakota) have trust laws that allow irrevocable trusts to be reformed or decanted to accommodate the trustee or beneficiaries.

There are many more complicated types of trusts that apply to specific situations. These specialty trusts are often created with a particular goal or objective in mind. Some common trusts include:

  • Dynasty Trusts: A dynasty trust is a vehicle used to allow a settlor to pass his or her wealth from generation to generation by insulating the trust assets from transfer taxes like estate, gift and generation-skipping transfer tax, creditor claims, and beneficiaries who are unable to responsibly manage their finances.
  • Domestic Asset Protection Trusts: A domestic asset protection trust is a specific type of trust that may be established by a settlor under state law in a limited number of states, including South Dakota. A South Dakota DAPT provides significant wealth preservation and transfer benefits by allowing the settlor to protect the trust assets against certain types of creditor claims.
  • Charitable Remainder Trusts:  Charitable remainder trusts allow you to donate to charity while receiving significant tax benefits. These trusts provide you or your family with a lifetime of income, while principal assets are donated to charity at the death of the income beneficiary.
  • Life Insurance Trusts:  An irrevocable life insurance trust (ILIT) is a trust primarily set up to hold one or more life insurance policies. The main purpose of an ILIT is to avoid federal estate tax. If the trust is properly drafted and funded, your loved ones should receive all of your life insurance proceeds, undiminished by estate tax.

There are many other types of trusts that serve additional purposes. The offerings and legalities vary from state to state. With so many laws to take into account, it's important to enlist the advice and services of an expert. An estate attorney or independent trust company can walk you through the process and help you reach your goals.

This article first appeared in Retirement Weekly Market Watch. Chad Halbur is the President of Cornerstone Private Asset Trust, a boutique trust company that works with families and individuals to help implement their estate planning goals and transition wealth from one generation to the next.