In a previous article we talked about various forms of asset protection. Here, I wanted to highlight another strategy often employed by high net worth families, trusts.
Firms like PPR seek to help generate wealth and income for investors but accumulating wealth and protecting it for generations require a different form of thinking.
This is where setting up a trust as part of your plan and having the right setup in place for you and your family is prudent to manage and distribute your assets according to your wishes – both during your life and after.
Very few tools are as impactful and adaptable as a trust. With the proper trust(s) in place, you can have peace of mind knowing that your assets will be transferred to your designated beneficiaries seamlessly, just as you envisioned. The types of assets you may transfer to a trust include:
- Property, including homes, land, or real estate investments
- Deposit accounts held at banks and credit unions
- Investments, including stocks, bonds, and money market accounts
- Life insurance policies
- Business interests and assets
- Collectibles and antiques
Understanding the Power of Trusts
While many immediately think of wills when considering estate planning, they’re not the only option. For all the permanence wills are meant to convey they can still be taken to court and put through the probate process. Your loved ones may face a frustrating and expensive ordeal if you don’t take care of potential probate issues in advance. Estate planning gets a major boost with the versatile benefits of trusts.
So, before I go any further, I should answer the question: what exactly is a trust? A trust is a legal arrangement where you, the trustor transfers assets to a trust. Then a representative of your choosing, the trustee, manages and distributes those assets according to your instructions. Whether you are nearby or across the globe, you gain protection and peace of mind. You have the authority to select a reliable individual or organization to serve as trustee, which can be a family member, friend, or professional.
The benefits of using diverse types of trusts
Asset Protection can be one of the primary benefits of establishing a trust. Trusts can effectively shield your assets from creditors, ensuring that they remain intact for your beneficiaries. This aspect is particularly valuable in safeguarding your wealth from potential legal claims or financial liabilities.
Trusts also offer a degree of privacy not found in wills. Since trusts are not public documents, the details of your estate remain confidential. This contrasts with wills, which are subject to public scrutiny once they enter the probate process.
Additionally, certain trusts can offer tax benefits. Establishing types of trusts such as irrevocable trusts can help reduce your estate’s tax liability, providing significant savings for your heirs. This strategic planning can enhance the value of the inheritance you leave behind.
From asset protection and privacy, to control over asset distribution and tax benefits, trusts provide a versatile solution to manage your wealth effectively. By understanding and leveraging these advantages, you can ensure that your estate plan reflects your wishes and safeguards your loved one’s financial future.
Exploring the Types of Trusts
Revocable Trusts:
A revocable trust, often called a living trust, offers flexibility and control. Throughout your lifetime, you’ll have the option to make necessary adjustments, corrections, or even abolish the trust if needed – the choices are yours alone. Life’s surprises can be constant and overwhelming, but having a safeguard such as a revocable trust means it can be molded to your changing needs. As the trustee, you manage and decide how the assets within the trust are distributed.
Advantages of Revocable Trusts
Assets in a revocable trust transfer to your beneficiaries, like family members, without going through probate court. You’re not only protecting your privacy but also saving your family from the emotional toll that can come with it. Revocable trusts also help plan for the unexpected. A revocable trust with a named successor trustee ensures a smooth management transition without court intervention. Your chosen trustee steps in, managing your assets according to your wishes.
Irrevocable Trusts:
Unlike revocable trusts, your decision is set in stone – you can’t change it once it’s in place. Once established, changing or dissolving them usually requires significant hurdles, often court intervention. Establishing an irrevocable trust is about letting go and entrusting your assets to the trust’s terms and the management of your appointed trustee.
Advantages of Irrevocable Trusts
While amending an irrevocable trust might seem restrictive, it opens opportunities for wise estate planning and asset protection. For those concerned about potential estate taxes, irrevocable trusts act as a shield. When you transfer assets into an irrevocable trust, you’re making a permanent decision. The payoff? A potentially smaller estate tax bill and more security for your heirs. Passing on wealth without hefty taxes means your family gets to keep more of what’s rightfully theirs.
Delving Deeper: Specific Types of Trusts and Their Uses
Beyond the basic revocable and irrevocable options, there are other distinct types of trusts, each catering to different estate planning goals.
Marital Trust
A marital trust, sometimes called an “A” trust, is commonly established to minimize estate taxes for surviving spouses. Think of this as a love letter to your spouse in legal form. Estate taxes can take a big bite out of your legacy, but a marital deduction can help save the day, slashing or even eliminating those taxes altogether. Simply put, it’s a legal agreement that lets you leave assets to your spouse while also dictating how those assets are managed and distributed. Consider it a way to safeguard their financial future even when you’re no longer present to do it yourself. Marital trusts are versatile and adaptable tools that help your legacy reflect your values. They can ensure the financial health and peace of mind of your loved ones.
Credit Shelter Trust or Bypass Trust
A bypass trust, also called a “B” trust or credit shelter trust, is for minimizing estate taxes for your heirs while maximizing the amount that passes to your spouse upon your death. In essence, the trust “shelters” a portion of the deceased spouse’s assets from these taxes. This enables the surviving spouse to benefit from these assets during their lifetime without inheriting the tax burden.
Here’s the big advantage: your assets are shielded from prying eyes. Credit shelter trusts safeguard the surviving spouse’s assets, ensuring they’re used as intended and protected from creditors or financial mismanagement.
Charitable Trust
Think of a charitable remainder trust as a win-win solution.A charitable trust allows you to leave a legacy by directing assets to your chosen charities, either during your lifetime or upon your passing. In short,you donate to charity, and as a result, you receive a stream of income payments. With the trust fully funded, the steady stream of income kicks in and these payments can be paid to you or other non-charitable beneficiaries for a predetermined period.
Charitable remainder trusts bring an array of benefits including your receiving an immediate income tax charitable deduction for a portion of the assets donated to the trust. By doing this, you can break up the cost over several years and watch your overall tax bill shrink.
Along with steady income streams, you can rest easy knowing you’ve got a financial safety net for life’s big expenses, from retirement luxury to your kid’s dream education. Lastly, one major advantage is that by placing highly appreciated assets within a charitable remainder trust, you can often avoid immediate capital gains taxes that would apply if you were to sell these assets outright.
Grantor retained annuity trust (GRAT)
This irrevocable trust is used by high-net-worth individuals to reduce tax implications for their beneficiaries. To set up a GRAT, you’ll transfer assets into the trust that are expected to appreciate over time. Then, you’ll specify the term for which you’ll receive an annuity payment based on those assets. As the GRAT’s term expires any appreciation on those assets in the trust passes down to the beneficiary with little to no estate tax burden.
Conclusion
Thinking ahead and setting up a trust is a selfless act that can bring your heirs and beneficiaries peace of mind and protection. A well-crafted trust allows for greater control over your legacy – from protecting your hard-earned assets to providing for future generations. From families to business owners, every individual has their own set of circumstances that demand a custom-tailored estate plan.
To learn more, talk to an estate planning advisor today and see if a trust is right for you.
If you would like to learn more about how to invest from a trust into one of PPR’s funds, feel free to contact our Investor Relations team or schedule a no-obligation call.
Disclaimer: Information provided by PPR Capital Management (“PPR”), its employees or agents is not to be interpreted as legal or financial advice; PPR is not a law firm, financial planner, or a certified public accountant and does not hold itself out to be either. PPR and its employees attempt to provide general information/ideas on issues commonly encountered by Clients. Requests for legal or technical opinions should be directed to your attorney, planner, or accountant
