Ten thousand baby boomers retire everyday according to research. All life transitions—even those late in life—can be challenging to navigate, and investors may turn to their advisors. Advisors should have trusts on their checklists as a key tool for helping their clients plan their futures.
While trusts can be complex in type and function, they can offer benefits that are nearly unmatched to any other single vehicle. Trusts can be used in a myriad of applications, including tax management, securing assets in perpetuity, charitable intentions and establishing a plan before it’s too late—all important areas to consider as generations move into the next stages of their lives.
Different Client Goals And Objectives. Different Trusts.
Before determining what type of trust may be right for each client’s situation, it’s best to take a step back to evaluate several different uses. Whether your client needs to transfer assets, provide liquidity to an estate or simply organize all assets, there’s likely a trust for that.
Holding assets in perpetuity to pass wealth from multiple generations. Dynasty trusts can be used in some states to secure assets, including stocks, bonds, rare pieces/collectables, real estate and art. A unique attribute of this type of trust is that when properly structured, it can last for many generations. For example, if a client wants to help ensure the family’s beach house gets passed on to future generations, a dynasty trust may be a good option.
Providing liquidity to an estate and/or business continuity planning. Businesses tend to be illiquid with all the wealth typically invested into current operations. An irrevocable life insurance trust can be set up to take ownership of the business owner’s life insurance policy to add liquidity. Additionally, it takes the life insurance policy out of the estate, which may mitigate estate taxes, while still helping to ensure a cash payout to the family in the event of the owner’s passing.
Organizing, protecting and avoiding probate. By setting up a revocable trust, you can help organize your client’s assets and affairs. This process will determine who owns each asset, and upon death, it converts to an irrevocable trust and becomes private. All assets are in the trust’s name, possibly eliminating the need for probate, which can be costly and risks public disclosure.
Transferring ownership of a business. An advisor could utilize a charitable remainder trust (CRT) for a client to transfer ownership of a corporate business (for C-corporations only) to other family members. The business owner transfers all or part of business ownership to the trust, usually allowing the option for other family members to buy the business from the CRT. The trust receives the gain on the sale rather than the trust grantor, so no taxes are due immediately. The trust grantor can help family members by providing a loan to make the purchase happen. Given today’s low interest rate environment, this could be a viable strategy to consider.
Donating to a charity. Other CRT benefits include a charitable deduction upon donation of the corporate stock, and the grantor or other income beneficiaries will receive annual cash flow for a period of time as a result. A charity or charities will benefit at the end of the CRT’s life.
Tax Management
Beyond the typical applications of trusts, tax management can be a common value-add for many trust vehicles and a top priority for many clients, regardless of age.
When it comes to income tax savings and charitable planning, a charitable lead trust (CLT) or CRT can be created, depending on the issue your client is trying to solve for. These trusts can offer the combination of income and estate tax savings, potential for tax-favored cash flow and charitable planning in one vehicle.