What is a trust and why is it useful?

While most Americans consider wills the de facto estate planning tool, trusts have additional benefits that may work for many of your clients. Deciding which is best for your client is a key step in the estate planning process. Let’s get the basics out of the way:

  • Wills. A will is a legal document that directs the distribution of assets after death. Wills are subject to probate, or the court-supervised collection and distribution of assets.
  • Trusts. A trust becomes valid upon execution. You can place any number of assets into the trust, including cash, stocks, or real estate. In the case of an irrevocable trust, once you place the assets in the trust, you lose control of the assets, which then fall under the care of a trustee, such as a bank or attorney.

Trusts have many added advantages. When executed properly, most trusts will avoid estate and gift taxes, as well as probate. Trustmakers (those who establish the trust) can also set stipulations for use of a trust, like restricting distributions to purchasing a home or financing education. Trusts can also help clients:

  • Ensure a child’s inheritance is properly managed
  • Ensure homes are transferred to designated beneficiaries in the event of death
  • Keep a business in family hands throughout generations
  • Protect family assets in the case of future divorces
  • Maintain privacy of assets since trusts are not public records

A trust can help incentive achievement for your children and grandchildren

Many parents, regardless of wealth, worry about spoiling their children. For those parents who have amassed great wealth, the concern often boils down to wanting to leave enough wealth so children can live productive, meaningful, and comfortable lives, but not so much wealth that the children choose to do nothing. While trustmakers will want to give their beneficiaries every opportunity, trusts can be crafted in a way that incentivizes education, hard work, or other desirable behavior.

Incentive trusts impose restrictions on distributions. For example, an incentive trust might require beneficiaries to graduate from college or even achieve a certain grade point average in order to receive money from the fund. They could require employment or charitable work, and reduce or cut off distributions for beneficiaries who fail to meet the requirements.

Incentive trusts have become increasingly common, but they’re not without their drawbacks. A trustmaker may not foresee all future problems, including medical emergencies or financial hardships, which might affect the trust’s stipulations and require greater financial distributions. Designing these trusts effectively requires careful listening and understanding of a client’s situation so that the incentive trust will work to further the client’s goals.

Regardless of your level of wealth, trusts are a useful tool for facilitating the control of assets.