Over the years, I have recognized that much of the estate planning we do at my firm involves trusts. Trusts are valuable structures that allow you to maximize tax-planning opportunities within your estate plan, spell out specifically how you want to distribute your assets, and ensure that your vision for your legacy is carried out faithfully.
However, people make one common mistake when setting up their own trusts: They pick the wrong person (often a family member) to administer it when the time comes. What’s wrong with naming a trusted member of your family or a close family friend to handle your affairs down the road? Well, we’ll get to that, but first some background.
A Few Words on How Trusts Work
A trust can be a powerful tool for integrating tax planning into your estate plan to efficiently transfer wealth to your heirs. By passing ownership of tax-advantaged assets, like life insurance policies, annuities or IRAs, to a trust with designated beneficiaries, the assets can continue to grow tax-deferred or tax-free (depending on the account), for many additional years. Roth IRAs, for example, are tax-free from a distribution standpoint, not only to the owner, but to the designated beneficiary as well. There are a variety of trust solutions available that can be seamlessly integrated with a client’s estate-planning objectives. Vehicles like generation-skipping trusts, credit shelter trusts and intentionally defective grantor trusts can maximize the value to beneficiaries while limiting their tax liability, when structured and implemented strategically.
Trusts can also be critical components for ensuring that a grantor’s vision for their legacy is executed faithfully once they’ve passed on. A trust is a legal document, written by an individual’s attorney to commit their wishes for their legacy to a legally binding mandate. The directives of the trust can include:
- Whether distributions will be stretched over time.
- Whether distributions or access will change at a certain age or at certain milestones.
- What goals the grantor has for the assets held in trust (e.g.: protect principal assets for the grandchildren’s education).
Trusts can be written to support whatever goal(s) the grantor has, and can provide as much leeway or rigidity as they desire, as long as the trust structure and distribution schedule is in accordance with IRS requirements.
Naming a Trustee
To ensure that the grantor’s wishes are faithfully carried out, it is essential to name a trustee who can competently and effectively handle the role. Because trusts will impact people the grantor cares deeply about, people setting up trusts often feel compelled to name someone close to the family as trustee. While it is beneficial for the trustee to know both the grantor and the beneficiaries, so that he or she can evaluate distribution requests in the spirit in which the trust was written, the potential downside is the administrative, fiduciary and legal requirements, which the trustee may or may not be capable of carrying out.
These responsibilities can be as varied as managing investment assets per the trust’s objectives and issuing monthly statements, to inventorying assets and filing notice to creditors. The trustee has many duties, and a legal liability if he or she fails to administer the trust assets appropriately. If the trustee does not have the expertise to manage the trust assets in accordance with the trust directives, or the time and resources to execute distributions and produce monthly statements, it may prove to be unfair to both the beneficiaries and the trustee to burden a family friend or relative with these obligations.
Selecting a Different Trustee Model Instead
In many instances, it may be appropriate to hire a third party, such as a trust company or bank to serve as corporate trustee. For example, if the grantor envisions preserving principal to provide long-term philanthropic support for a favorite charity, successor trustee risk becomes a factor. Corporate trustees will have the expertise and capacity to conduct the various administrative and reporting tasks, and the personnel to support long-term asset protection and distribution strategies. The challenge is that a corporate trustee may not be intimately familiar with the grantor or the beneficiaries, or, depending on the size of the institution, may not be able to provide the level of care or accessibility the family may require.
Another solution is a corporate directed trust model, where the grantor can enter into a bifurcated service arrangement. In this situation, the corporate trustee handles the legal and administrative aspects of the trust and is directed by the client’s existing financial adviser, who manages all of the investment and planning decisions concerning the assets held inside and outside of the trust. A corporate directed trust solution provides the unique benefit of allowing the client to integrate the trust into their existing financial plan, rather than having to hire a separate and unintegrated third party to serve as trustee. This solution would make sense for families of multigenerational wealth, business owners or corporate executives who wish to move the administrative and legal responsibilities of the trustee to an external partner while retaining the financial planning services of a trusted adviser.
The Bottom Line
A trust can be a powerful tool — it can help you protect your assets from estate taxes, it can protect your assets from spendthrift behaviors of certain beneficiaries, and it can provide legal directives to dictate how you want the assets you bequeath to be managed, distributed and invested.
The key is working with trusted professionals who understand your goals for your legacy to identify the most appropriate solution, so you can rest easy knowing your wishes will be carried out.
Casey Robinson is the Managing Director of Wealth Planning at Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh. He focuses on simplifying the complexities of wealth for a select group of individuals, families and family offices. Robinson has extensive experience assisting multi-generational families with estate planning strategies, integrating trusts, tax planning and risk management.
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