Despite its value to a client, trust planning is not widely understood, even by some insurance advisors. Knowing why and how to engage in trust planning can bring value to your clients and to your business. Not only can trusts help solve clients’ wealth transfer and taxation concerns, but the implementation process can also help deepen advisor relationships with clients across generations.
Trust planning is valuable to your clients and to your business. For your clients, trusts can help alleviate disharmony by eliminating the need for difficult and uncomfortable conversations about wealth transfer among beneficiaries after clients have passed away. Among the financial benefits to clients, trusts can provide greater control over assets than a will — serving as the vehicle to implement the wishes laid out in a will — including where blended families, heirs with spendthrift tendencies, or children with special needs are concerned. With trusts, clients are in greater control of their estate planning and the orderly disposition of everything they own once they die.
Trusts also allow clients’ estates to avoid probate, a process that may add time and lawyer fees to the distribution of assets and make the details of clients’ estates public knowledge; and help facilitate the preservation of assets across generations while enabling the gift of income for heirs.
In terms of your business, in addition to cultivating relationships with future generations, the process of trust planning can increase interaction with centers of influence such as attorneys and CPAs, creating a source of mutual referrals.
Why Trust Planning with Annuities?
Annuities can be used to optimize trust planning and effectively help solve the challenges that today’s investors’ face.
It’s beneficial for advisors to understand the various ways annuities can fit into their overall trust planning strategy to achieve clients’ long-term financial goals.
As an example, when structuring a trust using an annuity, an annuity can be owned by a trust to create a flexible income and wealth transfer strategy. When elected with non-qualified money, it can provide tax-advantaged lifetime income for clients and their beneficiaries.
An annuity can simplify trust taxes — if taxes are deferred, there is nothing to report. Once the income from the annuity is turned on, clients have access to diversified investments, but only receive a 1099 with the taxable income consolidated to a single entry.
Here are a few important questions you can ask your clients to begin the conversation about trust planning with annuities:
What is the purpose of your legacy? If your clients already have a trust, it’s a sign they have specific intentions on how to pass on their wealth. Don’t be afraid to engage in a few open-ended questions that can help you understand what your clients’ legacies mean to them.
Who is your beneficiary? An annuity inside a trust can be structured differently to benefit a grown child versus a grandchild in a generation skip. It’s important to ask probing questions: Should members of a blended family be treated differently? Do you have a child with special needs? Is there a spendthrift among your heirs?
How will the wealth transfer affect your beneficiary? Once your clients have passed, will their beneficiaries want to receive a lump sum of wealth or ongoing income? How tax-sensitive is the beneficiary – will the intended gift cause a tax hardship?
Do you need income? When structured correctly, annuities inside trusts can provide reliable income in a tax-efficient way that can continue for your clients’ beneficiaries. This important factor can affect how to best compose the strategy.
A Special Case for Special Needs
As you discuss the unique benefits trusts with annuities can provide, it’s also important to know the various circumstances where trusts can be particularly beneficial to a client. For the parent of a child with special needs, protecting their child while they’re alive and long after they’ve passed away is a primary concern.
For beneficiaries who may be unable to manage the gift of lifetime income on their own, a special needs trust with an annuity can help distribute assets for the benefit of that person based upon their needs as trustee deems fit in his or her own discretion — and for as long as they live.
Without a trust in place, the child may be left unprotected should something happen to their parent(s) or guardian. The trust can help ensure that Social Security disability benefits remain intact without placing too many assets into the name of the special needs child. By placing assets in a trust, the child does not have ownership in those assets, and the assets may be used to help support the child directly.
With the right knowledge, you can ensure that the annuity contracts inside of trusts are designed to reflect your clients’ needs and intentions when it comes to their beneficiaries. And, as previously noted, trust planning can be a great way to learn about the next generation of your clients’ families and develop relationships with these potential clients.
Every advisor should seize wealth transfer as a multigenerational growth opportunity. Making legacy planning a fundamental part of your practice can help you capture assets and retain those you've worked to help create. And, to incorporate unique and competitive investment strategies can only add to your value as an advisor.
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