Estate Trusts: Understanding the Primary Purpose – PillarWM
Do you want to keep your loved ones financially secure even after you pass away? If yes, you need to start off with estate planning right away! Estate planning often encompasses setting up estate trusts that can help you take care of essential elements such as preventing legal problems, lowering taxes, and safeguarding your family’s financial future. If you want to get more information regarding estate planning and how you can transfer your wealth, for estates between $5 million and $500 million, to your beneficiaries in a tax-efficient way, request a free copy of our new book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
STRATEGIES FOR FAMILIES WORTH $5 MILLION TO $500 MILLION
The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.
Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.
At Pillar Wealth Management, our team specializes in providing comprehensive financial and wealth management solutions that allow you to lower your tax burden, manage your wealth, boost your net worth, and devise a holistic estate plan. We are a fee-only advisory firm that exclusively caters to clients who are looking to invest $5 million to $500 million worth of investable assets.Schedule a free meeting with one of our wealth managers and get started with estate planning today!
What Is an Estate Trust?
A trust is a fiduciary relationship where one person, referred to as the trustor, gives another person, referred to as the trustee, the right to hold title to assets or property to benefit a third party, i.e., the beneficiary.
Trusts are created to legally safeguard the trustor’s assets, ensure that those assets are allocated to the beneficiaries according to the trustor’s wishes, reduce paperwork, and save time.In estate planning, particularly estate trusts also help to reduce or avoid estate or inheritance taxes.
What Is the Primary Purpose of a Trust?
Many people underestimate the importance of creating a trust. They believe that establishing a trust is just a complex and costly task that doesn’t offer any significant benefits. If you are also one of those who think, why would a person want to set up a trust, then check out the following reasons why people establish a trust.
1. Manage Assets
Trusts help people manage their assets in case they become unable to do so themselves. A lot of individuals set up trusts to prepare for the possibility that they might become ill or disabled before their death and hence incapable of managing their assets effectively. To get this protection, people establish a revocable living trust and a trustee to manage it. Simply stated, the financial advisors at Pillar Wealth Management can help change your perspective on how to manage your assets. For more information, read our unique guide on the five critical shifts that can enhance portfolio performance.
Moreover, in case your beneficiaries don’t have the desire or ability to manage the assets that you’ll be handing over to them, having trustees to manage those assets provides an effective solution to the problem. For instance, your children might be under 18 or might have a disability. You might want to manage the assets during your lifetime, but once you’re gone, a trust can provide effective management if needed.
Having a trust and selecting your own trustee prevents a situation where the courts must designate someone to manage your assets. A court-appointed guardianship can not just prevent you from controlling your affairs but can even result in extensive delays, paperwork, and other problems.
2. Safeguard Assets
Trusts are an effective instrument to protect your assets from lawsuits, marriage breakdowns, creditors, or from those who might want to influence your heirs. For instance, an asset protection trust is a trust that holds a person’s assets with the purpose of protecting them from creditors. These trusts provide the highest degree of protection from lawsuits, creditors, or any other judgments against your estate.
In addition, an asset protection fund can help to prevent expensive litigations before it starts, or it can favorably impact the result of settlement negotiations. If you want to learn more about how you can protect your assets and wealth, order a free copy of our hardcover book, The Art of Protecting Ultra-High-Net-Worth Portfolios and Estates – Strategies for Families Worth $25 Million to $500 Million.
3. Divide Assets and Property
If you don’t trust your heirs to directly inherit the assets you want them to get (probably because they are spendthrifts or minors), you can use a trust to allocate assets to them over time. For instance, in the case of real estate, a living trust is highly beneficial. It provides a higher degree of control than a will in detailing how such assets have to be divided after the trustor’s death.
A living trust can even map out who inherits the assets and who holds the right to use them, and under what circumstances. It can even provide specifics such as whether the property can be sold, and if yes, how the earnings have to be divided, and how the heirs of the property can buy each other out if they choose to do so.
This way, a trustor can ensure that every heir gets equitable access to the assets and property. Other assets that you can keep in a trust include a car or a boat that is intended to be used by all the beneficiaries or any other assets that the trustor might want them to share.
4. Provide Privacy
After your demise, your will is probably going to be probated. In such a situation, your will is going to become a public document, along with the value of your assets. Moreover, some people might be legally authorized to get a copy of your will. However, a trust agreement is a confidential document and can keep the details private. This is one main reason why many high net worth and ultra-high net worth will opt for a trust instead of a will.
5. Lower Estate Taxes
An estate tax is a tax levied on your right to transfer property after your demise. These taxes can consume a fair share of your heir’s inheritance. However, a trust offers a way to reduce or avoid estate taxes because property and assets kept in a trust aren’t subject to such taxes. For instance, with a children’s trust, a trust can make tax-free monetary gifts from an estate to their kids or grand kids. By making such gifts, the donor effectively lowers the taxable amount of the estate and hence reduces the tax burden.
Nevertheless, there are limits to how much money you can gift without paying taxes. For instance, in 2021, individuals can give their children or grandchildren $15,000 without having to pay any tax. This amount is referred to as the annual exclusion, and it is applicable to as many gifts as you give. Thus, if you three children and gift them $15,000 each over the span of a year, you won’t have to pay any taxes.
Estate tax benefits are primarily beneficial for high net worth and ultra-high net worth individuals who have high-value assets. To know more on how you can save thousands, or even millions, in dollars, read our guide, Improving Portfolio Performance.
6. Avoid Probate
While assets managed by you will have to go through probate to be verified and distributed according to your wishes, assets kept in a trust typically don’t have to pass through this process. When you establish a trust during your life, you only have to work with an attorney and your trustee to execute your wishes.
By avoiding the probate process, trusts are generally a simpler and quicker way to distribute your assets after your death. When you are dealing with the trauma of losing a loved one, or the transfer of wealth from one individual to another, you will definitely want the process to be as efficient and seamless as possible. Establishing a trust allows you to attain both of these goals.Schedule a free chat with one of our team members and find out how avoiding a probate can benefit you.
7. Support Charitable Causes
Establishing a charitable trust is a great way to give money to charity organizations that you support. A trustor can transfer assets such as real estate, money, or artwork to a charitable trust and designate that they ultimately be given to a particular charity.
Charitable trusts such as charitable lead trusts aren’t tax-exempted. However, they do give you the opportunity to retain highly appreciated assets, reduce estate taxes, and become eligible for income tax deductions. If you have $5 million to $500 million worth of investable assets and want to know more about tax-saving techniques, don’t forget to request a free copy of our book, 7 Secrets to High-Net-Worth Investment Management, Estate, Tax, and Financial Planning.
Types of Estate Trusts for Estate Planning
There are several kinds of estate plan trusts are for high net worth and ultra-high net worth individuals and families who want to decide where their wealth goes, rather than let the government decide. Each trust is created for a certain purpose, depending on your interests and needs. You can even establish more than one kind of trust.
1. Generation-Skipping Trust
The generation-skipping trust is an effective estate planning instrument in case your beneficiaries are suffering from a disability, are ineffective money managers, or perhaps have alcohol or drug-related problems. Such a trust will allow you to benefit from the resources, but the control will pass to the subsequent generation while avoiding estate taxes.
With a generation-skipping trust, you choose how much control to give your offspring. But the wealth is secured for your grand kids, making sure that your wealth passes to at least the second generation. If you need more details regarding a generation-skipping trust, book a free consultation with one of our team members.
2. Revocable and Irrevocable Trusts
Irrevocable trusts are those that cannot be changed once they have been established. Life insurance can serve several good purposes. However, if you aren’t cautious, it can result in a significant increase in your high net worth or ultra-high net worth estate, escalating your already high taxes.
For example, assume that you and your partner have listed each other as beneficiaries on your life insurance plan. When one of you dies, the other will get your life insurance payout. Thus, if you have an estate worth$40 million and you both have a life insurance policy of $5 million, the living spouse will receive $45 million.
Keep in mind that 40 percent of the increase in wealth will go to the government when the second partner passes away. Thus, after accounting for estate taxes, your $5 million life insurance policy becomes a $3 million policy. Not really what you signed up for!
With an irrevocable life insurance trust, you can effectively avoid this problem. It removes both you and your spouse from having any control of life insurance. Thus, the proceeds from life insurance are paid out of the estate rather than into the estate.
On the other hand, you can even establish a revocable trust, where you can change the terms of the trust at any time. For instance, you can add new beneficiaries, change existing ones, and modify the rules on how the assets of the trust are managed.
3. Grantor-Retained Trust
With a grantor-retained trust, you can gift assets for a specific number of years to an irrevocable trust. When the period ends, those assets might be given to the heirs and beneficiaries or stay put in the trust.
This kind of trust has multiple variations, including grantor-retained income trusts, grantor-retained unitrusts, grantor-retained annuity trusts, and qualified personal residence trusts. This can get pretty tricky. Before you establish this trust, you need to consult with specialized and qualified professionals.
Last Few Words
Understanding how estate trusts work is vital to holistic estate planning. Knowing the benefits of estate trusts and the types of estate planning trusts can help you handle your wealth and assets in a much better way.
If you wish to improve your estate planning, get in touch with Pillar Wealth Management. We cater to clients who have $5 million to $500 million worth of investable assets and help them attain financial serenity and security.
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