Use a trust for the things you care about

Y ou’ve worked hard to build your wealth and provide for your family. But the financial security of your family depends not only on good management of your wealth today but also on how your wealth is enhanced and safeguarded in the future. Trusts can help preserve your wealth during your lifetime and ensure that your legacy goals are realized.

What is a trust, and do you need one?

A trust is a legal entity that holds assets either for your benefit or for the benefit of others that you designate. In creating a trust, you name a trustee, who must follow your wishes in distributing the assets in trust to your beneficiaries. Unlike a will, which merely determines who gets what when you die, a trust can hold and control assets during your life and until the trust expires, which could be generations from now. A trust is also more flexible than a static will, and trusts can be as varied as the families they are designed to protect. To find the appropriate trusts for your needs, you can start with having a conversation with your Financial Advisor, as well as a lawyer specializing in trusts.

“Trusts have become the primary estate-planning vehi- cle because they afford so many benefits,” said Erin Wilms, head of advanced planning for UBS Financial Services Inc., “including ease of transferring assets to heirs, privacy, helping to maximize the value of your estate by reducing taxes, and the ability to exercise control over when your heirs receive assets. Trusts are an important consideration in an overall estate plan.”

Revocable living trusts: flexibility to avoid probate and protect your privacy

Revocable living trusts are designed to avoid the probate process, in which the court gets involved in distributing assets to your descendants as specified in your will. A rev- ocable living trust provides no special tax breaks to you because you still own the assets and can freely use them during your life. After your death, a revocable living trust bypasses the court, so a trustee can easily and quickly disperse the assets you transferred to the trust.

Living trusts offer privacy as well. “The probate process is a public proceeding, so anyone can go to the courthouse and see what you’re worth,” added Wilms. “Assets in a living trust, on the other hand, are completely shielded from public view.” A living trust can also allow a trustee you designate to manage your financial affairs if you become mentally incapacitated, avoiding the need to have a court appoint a guardian for you.

Irrevocable trusts: tax advantages and protection

In 2016, the federal government allows you to exclude $5.45 million – nearly $11 million for a couple – of your estate from estate and gift taxes. For those whose wealth surpasses the federal exclusion amount, there are a variety of trusts that can be used to remove assets from your estate so that they’re not subject to estate and gift taxes. These trusts are irrevocable, requiring you to forfeit your use of the assets and your ability to change or terminate the trust.

Even if your estate doesn’t exceed the federal estate and gift tax exemption, you may want to set up a trust to avoid state taxes, which can be high (for instance, Washington’s tax rate goes as high as 20 percent) and kick in at a lower rate.

“In New Jersey, for example, estates over $675,000 are taxed at a marginal state estate tax rate that can be as high as 16 percent, translating into over $400,000 of estate tax on a $5,000,000 estate and over $1,000,000 on a $10,000,000 estate, both of which might avoid all federal estate tax,” said David Neufeld, tax and estate attorney in Princeton, New Jersey. If you happen to live in the 18 states with estate or inheritance taxes, or the District of Columbia, you may want to consider an irrevocable trust to avoid that tax hit, according to Neufeld.

Other uses for trusts

Protecting assets:

Certain types of trusts can also be used to protect assets against claims by divorcing spouses, or creditors or even your child’s potential future exspouse. “High net worth individuals and those in certain professions are easy targets for nuisance or predatory lawsuits, and having assets in a trust can take away the incentive to sue,” Neufeld said.

To get creditor protection, generally you have to transfer assets before a major debt is due. Protection can come in the form of either irrevocable trusts or through direct gifts to your children, grandchildren or other third parties. Several states have enacted domestic asset protection trusts that allow the creator of the trust access to those assets in limited circumstances, such as a bankruptcy or other financial emergency. An inheritance on your terms:

Many parents will create trusts for the benefit of their children instead of leaving them an inheritance outright. Use of a trust to specify when and for what purpose you want your children to receive funds can prevent many financial and personal disasters if you have minor children. Trusts can also help with adult children who can’t responsibly handle an inheritance. A trust can also be used to preserve a special needs child’s eligibility for government-provided care and services. Charity:

“Charitable trusts can be a strategy for doing well at the same time you’re doing good,” Neufeld added. “These trusts balance the desire to give to charity with receiving a benefit either for yourself – an income stream

– or for your children in the form of a residuary gift.”

Your financial life encompasses more than the current markets. Trusts can be an integral component of a holistic approach to managing your wealth and providing for your family today and in the future. A conversation with your Financial Advisor may help you decide whether you might benefit from creating a trust, and of course, you should discuss these matters with your independent legal or tax adviser.