Which Trust Is Right?
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Evidence suggests that many people are establishing trusts as part of an estate plan. Some
motivations for creating a trust include avoiding probate, preserving privacy, planning for
incapacity, protecting a beneficiary's inheritance from creditors, minimizing estate taxes, and
charitable giving.
Financial advisors are intimately familiar with a client's financial situation and goals. You may
have clients whose needs or goals align with the advantages of a trust. You may want to open a
dialogue with these clients about implementing a trust. While you may not be able to offer
detailed guidance, you can introduce them to various available trust types and how a trust might
fit into their financial and estate plans.
Because of several converging trends - an aging population, rising asset values, a wave of
wealth transfers, and pending tax law changes - clients may be interested now more than ever
in a trust that can benefit them and create mutually beneficial arrangements between financial
advisors and attorneys.
How to Spot Trust Opportunities
A client may not directly bring up the subject, but trusts have been a hot topic of late in the
estate planning world, and there are signs that demand for them will continue to heat up in the
coming years. The National Association of Tax Professionals' director of tax content and
government relations said that more baby boomers are utilizing trusts because of concerns
about the next generation mismanaging their inheritance. In addition, such concerns are
"causing them to create trusts to pass assets efficiently, but with some control being exercised
from the grave."1
A guest post at Kitces.com says that advisors can start the conversation about estate planning
by first identifying whether a client has an estate plan.2 Many clients likely do not; as of 2025,
the number of Americans with a will is 24 percent and on the decline.3
Some of the leading reasons why Americans created an estate plan - or would consider making
one - include the death of a loved one, family expansion, travel, the purchase of a home or
significant asset, health concerns, retirement or other age-related milestones, and national or
world events.4
Starting the Trust Conversation
With only around one-fourth of Americans having completed even a basic will,5 the idea of a
trust may seem like putting the cart before the horse. Whether a client should establish a will
instead of or prior to a trust depends on their circumstances, but both options can and should be
considered.
Reasons that clients may want to consider a trust include the following:
- Having a large estate (specifically a net worth exceeding the federal estate tax
exemption or state-level exemptions for estate and inheritance taxes). If so, they could
consider the following:
- A grantor retained annuity trust allows the client to transfer assets to
beneficiaries while retaining an income stream.
- A charitable remainder trust provides an income stream to beneficiaries, with
the remainder going to a designated charity.
- A dynasty trust passes wealth down through multiple generations.
- Desiring complex distribution instructions, commonly sparked by having blended
families, beneficiaries with special needs, or beneficiaries who are prone to financial
mismanagement or vulnerable to creditors. These scenarios could lend themselves to
the following:
- A spendthrift trust protects assets from creditors and prevents beneficiaries
from squandering their inheritance.
- A supplemental needs trust enables a disabled beneficiary to receive financial
support from the trust without affecting their eligibility for means-tested
government benefits.
- An incentive trust makes distributions to a beneficiary upon their meeting
certain conditions, such as graduating, obtaining employment, getting sober, or
volunteering for charitable organizations.
- A qualified terminable interest property trust provides for a surviving spouse
while ensuring that the deceased spouse's assets ultimately pass to their chosen
beneficiaries when the surviving spouse dies.
- Being exposed to unique tax liabilities, such as having extensive real estate
investments or owning a business. Possible trust solutions could include the following:
- A qualified personal residence trust allows for the transfer of the client's
primary residence or, in some circumstances, vacation home, to a trust while
retaining the right to live in it for a set period.
- An irrevocable life insurance trust holds a life insurance policy that uses the
death benefit proceeds to cover estate taxes or provide liquidity to the business
after the client's death.
This list barely scratches the surface of the diverse estate planning scenarios that trusts can
address, from beneficiaries with specific or special needs to estates with complex assets or
challenging family dynamics.
While trusts offer various benefits, not all are the same. Bear in mind that the same trust type
can also be used for different planning purposes or to simultaneously achieve multiple planning
goals. A revocable living trust, for example, not only avoids probate but can also be used for
incapacity planning and estate tax mitigation.
In addition, trusts can hold various types of assets, allowing clients to get creative by, say,
transferring business interests into a trust for stronger asset protection and succession planning
purposes. Clients can also name a trust on a beneficiary designation or transfer-on-death
designation form to hold and manage the assets for their beneficiaries after the clients pass
away.
For a more comprehensive rundown on trust types, ways they can be utilized, and how they
may fit into a client's estate plan, schedule a time to talk.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
