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The Role of Trusts in Financial Planning

In the complex world of financial planning, one tool has gained increasing prominence: the Trust. These versatile entities can be powerful for estate planning, investment management, and asset protection.

The legal construct of a Trust offers a legal and creative means to transfer, secure and distribute assets for financial or personal gain.

Trusts are formed to accept a transfer of property to benefit another. This “exchange” (along with various trust and tax laws) is the basis for creative ways to accomplish many diverse financial objectives… from saving estate taxes to making charitable gifts.

A Trust is typically established in written form by a declaration or Trust Document, which identifies the parties to the Trust and its operating terms. (if a trust is formed by declaration in a Will, the trust is known as a testamentary trust. ) The key parties in a trust are the

  • Grantor – contributes property to the trust and establishes the terms of the trust, including Trustee responsibilities, investment management guidelines, manner of distributions, etc.
  • Trustee(s) – acts as a fiduciary of the trust and manages the property of the Trust in accordance with its terms. Typically, the Grantor of the Trust is also the initial Trustee, and carefully chosen successor trustees are named in the document.
  • Beneficiary(ies) – are the to-be recipient(s) of property as set forth in the trust document.

Advantages of using a Trust in a financial plan:

  1. Estate Planning — Trusts can play a critical role in estate planning by offering a mechanism to hold, manage, and distribute assets to family members or others before, upon, or well after the death of the grantor.
  2. Probate Avoidance — Trusts are valuable for easing the administrative burden of an estate by avoiding probate, a process that can be both time-consuming and costly, as well as visible to the public
  3. Tax Efficiency and Philanthropy — Trusts can play a valuable role in achieving charitable, tax, and cash flow objectives to benefit family members and charitable organizations. Further, irrevocable asset transfers can reduce the tax burden for those estates that are subject to tax.
  4. Wealth Preservation — Trusts can be used to purchase and own life insurance policies, which, if owned by the insured, would be included in the taxable estate. An irrevocable life insurance trust is often used as an efficient way to pay for estate taxes on an otherwise taxable estate and for future generations. This arrangement can also play a crucial role where high-value illiquid assets are held in the estate.
  5. Spendthrift Provisions — Trusts may include directives that prevent heirs from spending down an inheritance for undesirable purposes. These may be applied on an age-based or milestone-driven basis and may name all or some of the heirs with said limitations.
  6. Special Needs Planning — Trusts are instrumental in providing for special needs beneficiaries, ensuring they receive the care and support they require without jeopardizing their eligibility for government assistance.
  7. Asset Protection — Trusts can help protect the assets of both grantors and beneficiaries from potential creditors or legal challenges.

Future MCWS articles will explore various types of Trusts that provide the above advantages, beginning with a consideration of a Trust as a Will alternative (as a governing document to pass assets to your loved one). This trust has a few different names...we will use Revocable Living Trust. Typically, the "Trust or Will" question is one of the first decisions covered in a meeting with an estate and trust attorney.

If you have questions about how Trusts might play a role in your financial situation, feel free to contact one of our advisory team members.

Disclaimer: This article is designed to inform and should not be construed as advice. Individual facts, circumstances, and objectives differ. Please consult with your licensed estate attorney when finalizing your estate design.

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