Putting Your Trust in a Trust

Written by Lisa Brown, CFP®, CIMA® on January 1, 2016

A trust is a tool designed to control how assets are used and for what purposes they can be withdrawn. For many people, the first time they encounter this instrument is when their wealth advisor or estate planning attorney raises the question, “Do you want your children’s future inheritance left to them outright or in a trust?” It’s not just families with children who want or need trusts to be part of their financial and estate planning. Another common reason for establishing and transferring assets into a trust is for asset protection purposes. Trusts can benefit a wide variety of people for a number of purposes. The decision to place assets in a trust can have a big impact on your family’s wealth and the enjoyment of that wealth for many years, so giving thought to this before answering your advisor’s question is wise.

In many cases we see clients with young children opt to leave inheritance in a trust. Common distribution provisions say the money may be used for things like college, buying a first home, starting a business, and receiving the income each year off the trust until the trust principle pays out at a certain age (30, 35, 40, etc.). Special provisions or guidance can be included, such as allowing money to be distributed for a first home or start-up business as long as the trustee — the fiduciary appointed to make sure the trust provisions are carried out — approves the business plan in advance. For the most part, you can dial up or down the level of control you want to impart over trust assets after you’re gone. And, your desire for control can change over time.

As children become adults, parents may get a better sense of whether leaving inheritance outright or in trust is the right long-term answer for their family. Yet more concerns may arise such as, “What if they get divorced?”, “What if my kids are spoiled by my money and become demotivated to get a job?” or “My kids are building their own nest egg and won’t need this money — what’s the best way to delay when my family will pay estate taxes on it?”

Next, perhaps you (or your child) are a professional service provider and work in a litigious environment. Your attorney may recommend placing assets you’ve accumulated over the years into a special trust to help protect those assets from possible creditors. This can not only benefit you, but also future generations. Changing circumstances such as these are common reasons why estate documents should be reviewed and updated periodically. Depending upon the type of trust you’ve established, modifications may be made to the trust document to reflect evolving wishes and family dynamics. The practical experience of having money in a trust means your family will need to have good trustees (personal or corporate), investment advisors, accountants and attorneys to help implement and report on the provisions in the trust over the years. There is an expense to this and you’ll want to have a solid team in place that understands your family before the trust gets funded. After all, you need these fiduciaries and this tool working together to help carry out your wishes for these trust assets.

Thinking through the pros and cons with your team of advisors who have practical experience with trusts can help. Ultimately it’s a personal decision; one often centered on control and protection, and should be handled with care before you decide to put your trust in a trust.