Using Trusts to Organize Your Finances

Trusts can be powerful tools in organizing your financial affairs but they require careful thought about your objectives, a competent estate attorney to draft the legal documents, and thorough integration into the way your assets are titled.

Conifer Bay Capital works closely with estate attorneys to help clients extract the maximum value from utilizing trusts. (For introductory information about trusts, see What Comes After the Basic Financial Plan? Trusts!)

Creating and funding a trust is only the start of this best practice for wealthy families. Trusts require ongoing maintenance and revisions. Family trustees and beneficiaries also need continuing education to understand their rights and responsibilities.

Trust owners should review existing trusts with their attorney and financial planner after April 15 each year. Most wealthy individuals could benefit from a reminder of how their trusts are keeping their financial lives on track.

Relearning about Trusts

Over the past year, I have learned (or relearned) things about trusts, although I still lack the expertise and experience of an estate attorney. My knowledge has come from working with estate attorneys, attending the annual Notre Dame Tax and Estate Planning Institute, and being an active member of the Greater North Shore Estate & Financial Planning Council.

Here are a few of the things I have learned recently:

Trusts: Revocable, Irrevocable … or Both. You probably know that modifying a revocable trust is significantly easier than modifying an irrevocable trust. But, did you know that a trust can be both? If you create a revocable trust while you are living, it generally becomes irrevocable after your death. Confusing, eh?

So, if you are the beneficiary of a trust that your parents or grandparents created, it may have been a revocable trust during their lifetimes, but it probably became an irrevocable trust for you.

Consider whether a recent birth, death, marriage, divorce, or other change in your family warrants an update to your revocable trust. When family dynamics change, review the terms of your trust and assess whether your intent remains intact—or, in fact, if your intent has changed. A trust can be a living, breathing thing—and like all organic beings, circumstances can influence the way it behaves.

Irrevocable Trusts: Difficult to Change, but Not Impossible. Beneficiaries can be added or removed. Trusts can be terminated early or successor trustees can be named. Often opportunities exist to amend a trust for the benefit of all parties involved, such as increasing asset protection or optimizing estate tax benefits. While this is easier to do for revocable trusts, changes can still be made for irrevocable trusts—but amendments could require going to court, or getting unanimous agreement from the parties involved.

If you are a party to an irrevocable trust that you want to change, you will need to consider with your attorney how to change the trust without triggering any adverse consequences, such as additional gift or estate taxes.

A Trust Alternative to a Prenuptial Agreement. Many parents or grandparents are understandably concerned about an inheritance being vulnerable to an heir’s future spouse in a divorce settlement. At the same time, they may be equally uncomfortable with asking their heir to discuss a prenuptial agreement with his or her future spouse.

It’s a conundrum, to be sure, walking the line between concern and protection: while a prenup might be a good idea, such a conversation could potentially cause injured feelings on the part of the person who’s being asked to sign the prenup. A trust – if carefully constructed and managed – can achieve some asset protection benefits. It’s worth consulting an attorney to find out how this may affect you and your heirs.

The Holy Grail of Trusts: the HEET. Have you ever heard of a Health and Education Exclusion Trust (HEET)? It’s a dynasty trust designed to pay medical and tuition expenses for heirs two or more generations younger than the creator. The power of this type of trust is that it can reduce the 40% generation skipping transfer tax rate if trust distributions are limited to healthcare and education.

Think about your biggest expenses in your life: what’s more significant than healthcare, education, and housing? This trust can pay for two of the big three. Forget about King Arthur, this really is the Holy Grail.

The lesson here is that there are always new things to learn (or relearn) about trusts. Consult with an attorney before making any changes.

What Role can Conifer Bay Capital Play?

While wealth management firms like Conifer Bay Capital are not qualified to draft legal documents or give tax advice, we can help clients identify areas of concern based on their goals and concerns about their estate. This can be a helpful experience prior to engaging an estate attorney.

In addition, Conifer Bay Capital can help clients make sure assets have been retitled correctly, in accordance with any changes in their trusts or estate plans. This assistance is just one portion of the services we provide to our clients.