You can’t take it with you, but through a trust, you can define how you want your life’s work and wealth to continue to benefit the people and causes you love and care for.
Mention the term “trust fund” and many people are likely to imagine young slackers living off their family’s largesse or an older generation of parents and grandparents dictating life choices and conditions to their descendants.
Indeed, among the available tools for protecting and transferring assets, trusts may be the most misunderstood. Put simply, a trust can be a flexible and effective way for families to solve their financial issues and manage all kinds of challenges involving how to pass on assets and wealth to ensure a lasting legacy.
And trusts aren’t just for ultra-wealthy families with complex holdings. Trusts can help older parents with special needs children who require long-term care as adults; small business owners who want to ensure a smooth operational transition; or those setting up a legacy of continuing donations to charities and organizations.
In short: You can’t take it with you, but through a trust, you can define how you want your life’s work and wealth to continue to benefit the people and causes you love and care for.
The Basics of Trust
A “trust fund” is less a financial account than a contract to manage the investment and/or distribution of assets under that contract. Every trust has three components:
- Grantor: The person who transfers assets into the trust.
- Beneficiary: Any person(s) or institution(s) receiving assets or money from the trust.
- Trustee: The legal owner of the trust assets who administers, invests and makes distributions to beneficiaries, based on directions in the trust documents. Trusts can have more than one trustee.
Trusts are “revocable” or “irrevocable.” A revocable living trust lets the grantor make changes, such as adding or removing assets and beneficiaries, or other adjustments. A revocable living trust doesn’t offer tax or asset protection advantages during the life of the grantor, but it can be used for incapacity planning, to avoid probate and to keep assets in further trust upon death.
At your death, your revocable trust becomes irrevocable. Generally, an irrevocable trust cannot be changed or amended. Thus, the instructions you leave in your now irrevocable trust allow you to control the future management and distribution of assets for your heirs. Yes, you can control how assets are distributed after your death. But, you can also establish an irrevocable trust during your life. You may consider this if you want reduce certain tax liabilities, protect assets from creditors, leave assets in further trusts for a surviving spouse, children and/or charities or other estate planning goals you may have.
Choosing a Trustee
Given what’s stake, the choice of trustee can be critical, but not always immediately so. For a revocable trust, for example, you can simply name yourself and/or your spouse as the current trustee(s) so that you don’t have pay another trustee before the trust becomes irrevocable.
When you are not around to serve as trustee, however, you may want to consider an experienced professional or corporate trustee. Why? Because an irrevocable trust typically involves more sophisticated accounting, decision-making and tax planning. You need to carefully consider who can best serve your needs and those of your beneficiaries in managing your assets well before the transition to irrevocable-trust status.
Trusts, the Advantages
Some of the advantages of establishing a trust include:
Privacy: A conventional will becomes a public document upon death and its contents enter the public record during the probate process. However, assets held in trust remain confidential.
Creditor protection: As an independent entity, an irrevocable trust may protect the assets it holds from creditor claims, whether yours or your beneficiary's. Assets in revocable living trusts, however, are still considered your property and are subject to creditor claims.
Tax advantages: Assets placed in an irrevocable trust generally aren’t counted as part of your estate anymore. This can help you save on estate taxes if the value of your estate exceeds $11.4 million for individuals or $22.8 million for married couples, the current estate-tax limits1.
Charitable giving: Trusts can offer flexible charitable-giving options. For example, you can structure and fund an irrevocable trust that disburses investment income to your family members for a certain number of years, after which the remaining assets will be paid to a charitable organization you named as beneficiary. This type of trust allows for a charitable donation tax deduction in the year you fund it, while also providing income for your family members.
Asset distribution: Transferring assets to family members after death isn't always simple. Let's say you own a business and have three children, but only one wants to run the business after you die. Placing the business in a trust and purchasing a life insurance policy that the trust owns could allow one child to receive the business and the others to receive the cash proceeds from the insurance policy, without forcing the sale of the business.
Securing Your Legacy
Building, protecting and passing on a legacy involves much more than investing wisely. It requires careful analysis of your objectives, intelligent structuring of your assets and integrated, strategic planning and implementation. A trust can be a valuable tool for ensuring continuity in achieving the financial objectives you envision for your family, business and philanthropic organizations for years and even generations to come.
1 Source, IRS.gov: What’s New – Estate and Gift Tax
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.
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