While a comprehensive estate plan that incorporates trusts has been a crucial tool for couples with joint assets approaching or exceeding $10.68 million — the current gift and estate tax exemption amount — to minimize their estate tax hit, families with assets well below this level are increasingly catching on to the trend, writes Andy Friedman in his latest white paper.
In his recently released paper, “Four Reasons to Consider a Trust to Protect Your Assets,” Friedman of The Washington Update cites four reasons families are turning to trusts to help them protect assets from creditors, manage and grow assets for future generations, and ensure that their assets ultimately are distributed in accordance with their wishes to their heirs.
Friedman — a former tax lawyer to Major League Baseball, the National Football League, the National Basketball Association and the National Hockey League — also discusses the difference between “revocable” and “irrevocable” trusts, and which option families should choose in their specific circumstances.
The first reason the wealthy use a trust is to allocate assets among family members. In this case, wealthy families look at ways to provide for a spouse and for future generations, as well as children and their education.
For instance, Friedman writes, suppose you have children who are young or irresponsible and might squander assets they receive outright. “You can instruct your trustee when to distribute income and principal to each child. Such instructions can be based on age or on a specified accomplishment (e.g., college graduation). In this manner, you can seek to influence your children’s behavior even after your death.”
The second reason to use a trust is to ensure professional management of assets. Individuals, Friedman writes, “might be concerned that their heirs’ lack of financial sophistication — or the heirs’ divergent interests and needs — will preclude the effective management of the assets. A trust allows an individual to ensure that assets continue to be managed properly and to grow.”
Indeed, professional management provides a buffer for battling heirs. “By putting the asset in a trust, you can appoint a trustee to manage the asset and distribute income to your heirs per your instructions, helping to preserve family unity,” Friedman says.
Professional management also prevents a child that’s named to administer assets for all of a family’s children from potential fiduciary breach suits if his actions are challenged. “Naming a professional manager alleviates this concern by shifting the management duties away from a family member,” Friedman says.