To Trust or Not To Trust

It is hard to imagine an individual or family doing any income or estate planning without considering the use of trusts. It is a misconception that trusts are only tools for the mega wealthy. In fact, trusts are something that can be utilized by many people to accomplish some very basic and extremely important objectives.

When one is deciding on how to provide for the ongoing health, welfare, and security of one’s family, a trust should be considered. A trust is a separate entity that may be used to achieve the transfer of wealth. It allows one to designate who ultimately receives his or her property, yet still allows for control of assets as well as the timing and amounts of distributions.

Here are the basics of how a trust can work for you:

  • A transferor or grantor transfers assets to a trustee to hold for the benefit of beneficiaries who ultimately receive the property. This transfer may occur during lifetime (inter vivos) or upon death (testamentary). The trustee manages and protects the assets and makes distributions to the beneficiaries according to the express wishes of the grantor. This allows the grantor to take many factors into consideration when determining the ultimate use of the wealth he or she has created.
  • An inter vivos trust can provide the benefits of immediate asset management, avoidance of probate, reduction of possible estate taxes, and what may be most important: protection from creditors.
  • The testamentary trust may be used to remove assets and all future appreciation of such assets from the grantor’s estate. If you live in a state like New York that taxes estates starting at one million, this is an extremely powerful estate-planning tool, as one may be able to use discounts to shelter even more from taxes.
  • For income tax purposes, it is sufficient to know that the tax burden follows the money. If distributed, the beneficiary pays the tax on earnings and if retained by the trust, the trust pays the tax. Proper tax planning is important as the trust is subject to narrower tax brackets, which usually means a higher tax.

I believe that one aspect of trusts that makes them a useful tool for anyone is protection from creditors. Depending on state laws, assets placed in trusts may be able to be sheltered from the reach of others. Thus, a grantor may be able to guarantee that he or she will have assets to provide his or her family with, no matter how large the grantor’s future debts and liabilities become.

My recommendation is for you to consider trusts as part of your planning. You may be able to achieve a great deal for your family including peace of mind and possibly incredible tax benefits. So, meet with your professional advisor, pick a trustee, decide which property to consider for transfer, decide who the beneficiaries will be, and decide when they will receive distributions. Your advisor should be able to help you decide which type of trust to use and then tailor it specifically for you and your family.

Feel free to contact me via email at skruth@darcangelo-cny.com or by phone at 315-475-7213.

Sheldon B. Kruth, CPA