Despite rising estate tax exemption amounts, trust usage remains high, as a growing number of parents turn to these valuable mechanisms as a means of ensuring that the financial legacy they leave their adult children is protected—from potential creditors, future divorce settlements and even irresponsible spending behaviors. In fact, non-tax reasons for establishing a trust now far outnumber more traditional tax-efficient wealth transfer reasons.
Most people would instantly balk at a proposed investment where there was a 50 percent likelihood of losing half your money. Yet with the current U.S. divorce rate, that’s essentially what many wealthy parents are doing when they gift assets to a child who then comingles those assets with their spouse by depositing them into a jointly held account or purchasing property that is jointly owned.
Furthermore, as the dynamics of modern family life continue to become increasingly complex in light of the growing number of blended and non-traditional family structures, patriarchs and matriarchs are finding it more and more difficult to feel confident that their assets will ultimately be distributed in accordance with their wishes.
Many types of trusts (including living trusts that become irrevocable at death, testamentary trusts and dynasty trusts) can be used to address these issues, ensuring that legacies intended to be the separate property of your children are protected from future lawsuits and liability claims by creditors or ex-spouses, as well as from their own spendthrift behaviors if necessary. Your children, grandchildren and even future generations can receive distributions from these trusts without ever having legal ownership of them, which means the trust assets will not be included in their estates.
Case study: An irrevocable trust in action
Stephen and Sarah Collins intend to leave half of their $3 million estate to each of their two children, but they also have some real-life concerns. While 35 year-old Kevin is a successful restaurateur, he’s experienced substance abuse problems in the past that the parents fear a sudden influx of wealth might reignite. In addition, their younger daughter Karen has recently gotten remarried to a man about whom Mr. and Mrs. Collins have significant reservations.
For the Collins family, a simple irrevocable trust may be able to address both their concerns. By working with their attorney and financial advisor, the couple could establish and fund the trust naming their children as co-beneficiaries. Because the children are beneficiaries rather than legal owners of the trust, however, those assets are protected from equal property distribution laws in divorce settlements as well as from personal creditors. Furthermore, the trust can be established with a “spendthrift” provision and have all distributions overseen by a professional trustee to help protect Kevin from relapsing into old habits.
Although your beneficiaries might initially worry that an irrevocable trust is intended to control their inheritance from the grave, a properly structured trust compared to an outright bequest can benefit them in a number of ways and harm them in none. They can control trust investments, remove and replace trustees and even direct distributions subject to certain restrictions—all while safeguarding the assets and avoiding adverse tax consequences.
While establishing a trust can certainly be a more complex and costly endeavor than simply gifting or bequeathing assets to your heirs, more and more wealthy parents seem willing to incur those costs in order to safeguard their children’s and grandchildren’s futures. Take time to talk with your SunTrust advisor about your various legacy goals and concerns. He or she can help you explore whether a trust may be beneficial in meeting your needs.