Oftentimes, trusts are used as a tax-reduction solution in the estate planning discussion, as part of our comprehensive financial planning process. But it can do so much more in the way of giving clients control over their immortal destiny. As you’ll learn, there are many types of trusts that can be used as part of an individual’s overall financial planning strategy. In our day-to-day meeting with advisory clients, we are finding that individuals need to also consider ‘non-tax reasons’ for the use of trusts. What are these non-tax reasons? Well, they include ensuring that assets pass to the intended beneficiaries at the time and in the manner desired. And defensively, to protect the assets passing to beneficiaries instead of creditors.

I’m often asked by some clients, ‘Do I need a Trust?’ And like many things planning, it depends on your circumstances. But without reservation, I wholeheartedly believe that trusts provide significant benefits.

And similarly, the reasons for establishing a trust are as different as the people who have them. Like financial planning, there are no two alike due to the uniqueness of each person’s needs, desires and concerns. Regardless of their personal differences, many people discover that a trust is a smart addition to their estate strategy. A properly structured trust can be a prudent way to hold and distribute assets. And, depending on the type of trust established, it can protect assets from creditors, reduce estate taxes, and allow for greater control over asset management and distribution after death.

Because SEA Financial Hawaii does not give tax or legal advice, we encourage individuals to consult with their tax and legal advisors to explore the concepts discussed below. However, we do have vetted resources—professional alliances—with various attorneys and firms that we share with clients. In fact, I accompany my clients on their first visit with an estate planning attorney, especially if being referred by us. This referred group of professionals can work you to help determine if, and how, a trust can be used as part of your estate strategy.

So, what is a trust? Investopedia says that a “trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary.” https://www.investopedia.com/terms/t/trust.asp

Simply put, a trust is an arrangement where one person agrees to hold property for the benefit of another person or persons. This is especially useful in situations where the beneficiary is vulnerable or under legal disability, such as when:

• One spouse wishes to protect assets from their creditors so that they may benefit the other spouse.
• The beneficiary is a minor.
• The beneficiary is unskilled in financial matters.

Of course, this is only a cursory list. In the real world, the kinds of situations and outcomes are very broad, and again, unique as the people who have trusts. Years ago, I was told if you have a spouse, children and/or you own a home or substantial assets, you need a trust.

There are all kinds of trusts, with varied uses and purposes. But they all fall into one of two classes:

• Living and
• Testamentary.

Living trusts can be either revocable or irrevocable, and testamentary trusts are created at death based on terms in your will. The discussion that follows focuses on some of the more commonly used trusts, including an explanation of any tax advantages.

A Revocable Living Trust is a trust created during the grantor’s lifetime and allows the grantor (you) to maintain total control over the trust during your life. A revocable living trust is an efficient and effective way to transfer property at the time of the grantor’s death.

An Irrevocable Living Trust is a trust that is established by the grantor while they are still alive and which, by its terms, cannot be revoked or terminated by the grantor. One reason to choose irrevocability is to remove the trust assets from the grantor’s taxable estate. An irrevocable life insurance trust (ILIT) is probably the most common example of an irrevocable living trust.

A Testamentary Trust is a trust established under a decedent’s will is known as a testamentary trust, and the grantor is referred to as the “testator,” that is, the maker of the will. Testamentary means “at death,” and such a trust has no legal value or effect until the testator’s death, as it does not come into being until the testator dies. Because a testamentary trust is not actually established until death, the trust may be modified or revoked beforehand by amending the will. After the grantor’s death, the testamentary trust becomes irrevocable. Because it is created by a will, the assets of a testamentary trust are subject to probate and may be taxed as part of the estate.

As a fiduciary financial advisor, my mission is to do what is in the best interest of my clients. When clients ask me why they should have a trust documented and recorded, it comes back to one thing for me: Your desires and wishes. In my work, I find that most trusts are created to help minimize transfer tax consequences (i.e., estate and gift taxes, generation-skipping tax, etc.). However, I often share with my clients that they may offer advantages beyond the surface tax savings. Most importantly, trusts allow you (the grantor) to do what you really want to do with your assets, possessions and wealth. Again, it gives you control over your wishes. Not the courts. That’s invaluable. Years ago, a veteran advisor told me, ‘Just tell your clients this: if they don’t have a trust, the courts will have one for them. However, they may not like it, but by then, it will be too late…’ Yes, not eloquent, but it drove the message home for me.

Finally, here are more non-tax advantages of using trusts. First, control. Gives you oversight as the grantor. Then there is financial management. A trustee you select can ensure beneficiaries are taken care of. And it also provides protection against creditors. An important benefit to some is the use of ‘staggered distribution ages. I have a client who wanted to ensure that the trust made distributions to his children over a period of time to enable them to become more mature and learn how to handle financial matters. In this client’s case, income from the trust was distributed annually plus one-quarter of trust funds (corpus) at age 25, 1/3 at age 30, ½ at age 35 and the balance at age 40. If there was no trust in place, the inheritance would be handed to the children at the age of majority (Hawaii recognizes the age of majority as age 18).

As this brief article explains, it is imperative that you work with an experienced professional. We can provide you with an overview, as well as the costs associated and the complete details including a referral to an estate planning attorney. As indicated, there are a lot of moving parts. But remember this: Life is unpredictable, and procrastination can really hurt you. So, take action today to protect those you love. And I guarantee, you won’t regret it. -SEAFIHI

At SEA Financial Hawaii, we do not provide tax, accounting, or legal advice. Clients should consult their own independent advisors as to any tax, accounting, or legal statements made herein. This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients.