There is a myth that trusts are only useful for saving taxes, protecting minors, and protecting spend-thrifts. On the contrary, leaving property in trust rather than outright can provide significant non-tax benefits for the trust beneficiaries.
During my 40 years of work in the estate-planning arena, I have had countless discussions with parents about their children. These discussions attempt to answer the question, “Will my child or children be a good steward of the assets that they inherit from us?”
If the parents feel their children will be good stewards of the assets, they will indicate that their children have:
- Good heads on their shoulders.
- Good jobs.
- Good spending habits.
- Good marriages.
- No problems with gambling, drugs, or alcohol.
In planning for these “responsible” children, parents usually feel that there is no need for a trust to professionally manage the assets for their children after the parents’ death and therefore want their children to receive their inheritance outright after their death.
There are instances in which the parents may feel their children will not be good stewards of the assets. In these instances the parents will indicate their children have:
- Mental, physical, or substance abuse problems.
- Personal or marital problems.
- Poor money management skills.
- Poor judgment and are easily influenced by others.
In planning for “unreliable” children, parents will most likely want the inheritance to remain in trust so the trustee can professionally manage the assets for the child or children.
All too often, advisors will counsel their clients that it will be obvious whether or not to leave their inheritance outright or in trust for their children. These advisers sometimes make this a black and white issue by counseling that if a child is responsible, you should leave them their inheritance outright, and if the child is unreliable, you should leave them their inheritance in trust. In my opinion, the decision on whether or not to leave assets outright or in trust is a gray issue because children may:
- Be hard working, smart, and have a good marriage but may not have the education and training to manage a significant sum of money.I have seen children squander significant inheritances by making bad investment decisions.
- Be responsible today but may not be responsible in the future.
- Change their spending habits and work ethics after receiving an inheritance.
- Get divorced, causing the inheritance to become entangled in domestic proceedings.
- Be subject to legal proceedings, causing the inheritance to become entangled in judgments, subject to attachment.
Here are some of the reasons you may want to leave your assets in trust for both your unreliable and responsible children.
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 the 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 can accomplish this objective for your beneficiaries in a simple, cost-effective, and safe manner.
Claims of Spouses
If a trust beneficiary divorces his or her spouse, a divorce court has the ability to divide property between them. Assets inherited outright by an individual might 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 guarantee that it will not be subject to division by a divorce court. Additionally, most states grant your beneficiary’s 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 the 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 the property left in trust after your beneficiary’s death. You may desire this result, 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.
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 conservator to manage the property owned outright unless your beneficiary has given power of attorney to an individual. After a guardian has been named, continued court supervision over the management of investments is usually required.
At your beneficiary’s death, the probate process may cause delay in the executor’s ability to collect, manage, and distribute the property owned outright. Assets in trust are available to immediately pay debts and estate taxes. There is also continuity of professional management when. assets are held in trust.
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 donations.
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 the flexibility lies in the drafting of the trusts. 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.
Controlled Spending
Maximizing investment returns is often viewed as the best way to preserve and build wealth. Wealth, however, is frequently sensitive to spending patterns. By creating and funding trusts, rather than giving money to your heirs outright, you can establish appropriate controls to manage how much children and grandchildren can spend while they are maturing and developing financial management skills.
Greater Investment Opportunities
Your family can invest in an institution, achieving the greatest diversification, economies of scale, and access to institutional money managers. Your family can also receive the benefits of having a larger relationship with a single financial provider rather than having each heir establish a relationship with his or her own advisor.
In Summary
Trusts can be much more than vehicles to save taxes or protect an unreliable beneficiary. Because of the many advantages offered by trusts, they can be powerful tools for your unreliable children, but especially for your responsible and most financially sophisticated children.
This article is strictly for information purposes and is not intended as an offer of solicitation for any transaction.
The information herein is not intended as legal, tax, or investment advice. For such advice, consult an attorney or tax professional. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Carson Partners, a division of CWM, LLC, is a nationwide partnership of advisors. The views stated in this article are not necessarily the opinion of CWM, LLC. and should not be construed directly or indirectly as an offer of services. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
