High-net-worth clients can see tax benefits and other advantages by providing for their heirs with trusts instead of through wills.
The late actor Burt Reynolds’s will, for instance, contained an apparent disinheritance of his son, who was omitted from the will. He was instead provided for by a declaration of trust.
As inheritance tools, trusts can have advantages over wills, though details are key. “Creating a trust to hold assets to pass to your heirs is a way to avoid probate, create a more seamless transfer and maintain privacy,” said Stephanie Sandle, a CPA/CFP and managing director at MAI Capital Management in Cleveland.
But advisors also caution that replacing a will with a trust isn't always an ideal strategy.
“We don’t generally favor using trusts simply to avoid probate unless there’s another good reason, because the biggest misconception of all of our clients is that a trust is something that you create and forget about,” said Michael Feinfeld, a New York-based tax and business services manager in Marcum LLP’s trusts and estates group.
The benefits of a trust often depend upon the state where the trust is created and administered, how well the trust is drafted and funded and the type of trust used. These are three simple examples of trusts:
• A revocable living trust can work well for property in multiple states to avoid ancillary probate proceedings. It is also useful for when the creator suffers from a progressively debilitating disease, allowing a trustee to step in and take over the trust administration.
• “Dynasty trusts are a great way to transfer legacy assets to successive generations while reducing the size of a creator’s estate for estate tax purposes by utilizing the creator’s generation-skipping transfer tax exemption,” Feinfeld said.
• Grantor retained annuity trusts, used to transfer highly appreciable or high income-generating assets to the creator’s beneficiaries, can help reduce a probate estate.
First, advisors need to determine the trust's basic structure. For example, a revocable trust is suitable for avoiding probate; an irrevocable trust is better for minimizing estate taxes.