Why more families are putting their wealth in trust

Estate planning used to be a topic that many families put off until they felt they had accumulated enough wealth to make it necessary. A will, a power of attorney and a health care directive were often viewed as sufficient for most families. Today, more families are taking a closer look at whether a trust should be part of their estate plan, and the reasons go well beyond avoiding estate taxes.

For many families, the motivation is simple: They want to make life easier for their children. They also want to have greater control over how their assets are transferred and provide some protection for the wealth they have spent decades building. A trust can address several of these concerns in ways that a traditional will cannot.

Making it easier for your children

One of the most practical reasons to establish a trust is to make the estate settlement process easier for the next generation.

When assets are owned by an appropriately structured revocable living trust, those assets generally do not have to pass through probate. Probate is the court-supervised process used to administer assets that are subject to a person's will but are not otherwise transferred by beneficiary designation, joint ownership or another mechanism.

Avoiding probate can potentially save time, reduce administrative complexity and provide greater privacy. More importantly, it can make the process of settling an estate less burdensome for the people who are already dealing with the emotional difficulty of losing a parent.

A properly funded trust can allow a successor trustee to step into the role of managing and distributing trust assets according to the instructions established by the person who created the trust. Rather than leaving children to figure everything out after a parent's death, the trust can provide a roadmap for what should happen next.

Protecting wealth after it leaves your estate

Another reason trusts are becoming more popular is that parents are thinking beyond their own estate. They are not only asking, "How do I pass assets to my children?" They are asking, "What happens to those assets after my children receive them?"

An outright inheritance becomes the child's property. Depending on the circumstances, those assets could potentially become exposed to a future creditor claim, lawsuit or marital dispute. The level of protection depends heavily on state law and how the assets are structured, but an inheritance held in a properly drafted continuing trust can provide significantly different protection than an outright distribution.

This is particularly relevant for families who have spent decades building significant wealth and want to preserve some of that wealth for their grandchildren and future generations. A trust can potentially allow a child to benefit from inherited assets while keeping those assets separate from the child's personal assets.

The goal is not necessarily to prevent a child from having access to the money. Instead, the trust can provide a framework under which the child can benefit from the assets while providing additional safeguards around ownership and control.

The marriage question

Marriage is another consideration that many parents are thinking about when developing an estate plan.

A parent may have a wonderful relationship with a child's spouse and have no reason to believe that will ever change. But estate planning is about preparing for circumstances that may be unlikely but potentially significant.

If a child receives an inheritance outright and subsequently divorces, the treatment of those inherited assets can become complicated. The rules vary significantly by state and depend on how the inheritance was handled during the marriage. Commingling inherited assets with marital assets, for example, can create issues that may not exist if the inheritance remains properly segregated.

A trust can provide another layer of structure. Instead of distributing the inheritance outright, parents can establish a trust that allows their child to benefit from the assets while maintaining a degree of separation between the inherited wealth and the child's marital estate.

This does not mean a trust can guarantee that inherited assets will never be considered in a divorce or other dispute. State law, the terms of the trust and how the assets are managed all matter. But thoughtful trust planning can provide a significantly different level of protection than simply writing a check to the child.

Keeping the wealth in the family

Some parents also want to make sure that assets remain available for their descendants rather than eventually passing outside the family.

A trust can establish rules governing how assets are distributed to children and grandchildren. Rather than giving a child complete ownership immediately, the trust might allow distributions for health, education, maintenance and support or provide the trustee with broader discretion.

This can be particularly valuable when beneficiaries are young, financially inexperienced or simply not prepared to manage a substantial inheritance. It can also help families think beyond one generation. A trust can potentially continue for the benefit of grandchildren and future descendants, depending on state law and the terms of the trust.

In this way, estate planning becomes less about transferring a dollar amount and more about transferring wealth responsibly.

Planning for incapacity

Trusts can also play an important role before death.

A revocable living trust can provide a framework for managing assets if the person who created the trust becomes incapacitated. Rather than requiring a court proceeding to determine who can manage assets, a properly drafted trust can identify a successor trustee who can step in and manage the trust assets according to the terms of the document.

This can be particularly valuable for an aging couple. If one spouse becomes incapacitated, the other spouse may be able to continue managing trust assets. If both become incapacitated, the successor trustee can step in without waiting for a lengthy court process.

Trusts are not just for the ultra wealthy

Perhaps one of the biggest misconceptions about trusts is that they are only appropriate for extremely wealthy families. The reality is that the reasons for establishing a trust often have little to do with the size of the estate. A family may want to avoid probate, maintain privacy, simplify estate administration, provide for a child with special circumstances, protect assets from potential future disputes or establish a framework for transferring wealth to grandchildren.

Those goals can exist whether a family has $1 million or $50 million.

The type of trust and the appropriate structure, however, can vary dramatically. A revocable living trust designed primarily to avoid probate is very different from an irrevocable trust designed for asset protection or estate tax planning. The right structure depends on the family's goals, state law and financial circumstances.

The estate plan should be designed around the family

The most effective estate plans are not simply collections of legal documents. They are plans for how a family wants its wealth to move from one generation to the next.

That may mean making the process as easy as possible for children after a parent's death. It may mean protecting assets from potential creditors or marital disputes. It may mean providing guardrails for a beneficiary who is not ready to manage substantial wealth. It may simply mean ensuring that assets remain available for children and grandchildren for generations.

A trust cannot eliminate every risk, and it does not replace the need for appropriate beneficiary designations, asset titling, insurance and other estate planning tools. It also needs to be properly drafted, funded and administered to accomplish its intended purpose.

As more families think about not just how much wealth they will leave behind but how that wealth will be managed after they are gone, trusts are becoming an increasingly important part of the conversation.

The ultimate goal is not simply to leave your children an inheritance. It is to make the transfer as orderly as possible, preserve the value of what you have built and give the next generation the best opportunity to use that wealth in a way that reflects your family's values.

Reid Schwartz is a columnist for The Item and Co-Founder of Creech Schwartz Wealth Management &Partners in Sumter, where he works as a financial advisor helping individuals, families, businesses, and nonprofits plan for long-term financial success.

Tax and accountancy services are not available through or provided by Creech Schwartz Wealth Management or &Partners LLC.

This article is for educational purposes only and not to be interpreted as tax or legal advice. Any tax planning strategies discussed by Creech Schwartz Wealth Management will be in conjunction with your tax/legal professional.

Securities and investment advisory services offered through &Partners LLC, a broker-dealer and investment adviser registered with the U.S. Securities and Exchange Commission and member FINRA, SIPC.