Why everyone could use a Trust when leaving an inheritance

Many people find trusts confusing or complex. Historically, trusts were the domain of the ultra-wealthy, used to pass on assets while minimizing taxes. This spurred an industry of financial advisors catering to affluent clients, creating unnecessarily complex and expensive trusts. If you favor a low-cost strategy, you might think trusts aren't for you.

But I’m here to tell you that trusts can benefit everyone. The key is to tailor the trust to your asset level. Always choose the simplest and cheapest trust structure for your circumstances.

If your assets might exceed the estate tax exemption limit upon death ($13.6 million per person, or $27.2 million for a couple), an irrevocable trust is necessary for estate tax relief.

However, for the 99% of Americans whose assets do not meet this threshold, a simpler and cheaper revocable trust can offer many benefits. Specifically, you can use a Revocable Trust that becomes an Irrevocable Trust upon death, designed as a dynasty trust to maximize benefits.

This means your trust is revocable during your lifetime, allowing you to make changes and manage assets. Upon your death, it becomes irrevocable, continuing to exist without being changed by heirs. The assets remain in trust for your heirs. Doing so provides the following benefits:

Benefits of Using a Trust to Leave Assets to Heirs

1. Guidance from beyond the grave: Traditionally, heirs received assets as cash or property to use as they wished, which isn’t always ideal. A trust allows you to provide guidance even after you're gone. You can specify that funds be used only for education or major life purchases, or that investments be managed professionally.

2. Independent trustees: A properly set-up trust should utilize an independent trustee. Your heirs will apply to the trustee when they request a distribution from the trust. This protects your heirs from inappropriate spending, falling for scams, or accidental mismanagement.

3. Creditor protection: If an heir with a large inheritance falls into debt, creditors could seize those assets. A correctly defined trust safeguards these assets from creditors.

4. Divorce protection: Divorce rates are high, and an ex-spouse could claim part of an inheritance as community property. A trust ensures that your assets remain in the family, not divided in a divorce. Unlike prenuptial agreements, which are tricky and not always enforceable, a trust is a much more reliable instrument for keeping your assets in the family.

5. Multigenerational wealth: Direct inheritance adds assets to your heir's estate, potentially pushing them above the estate tax exemption limit. A properly set-up trust keeps assets outside your heir’s estate, allowing your savings to pass on to the next generation tax-free.

6. Minimizing income taxes: If your heirs live in high-tax states, establishing your trust in a tax-free state (like Nevada) can help your estate grow without income tax. States have varying rules on trust taxation, so setting up in a tax-free state is generally beneficial.

Conclusion

Trusts are not just for the ultra-wealthy; they provide valuable benefits for anyone looking to manage and protect their assets. While historically trusts have been complex and costly, simpler, low-cost options can offer significant advantages for the average person.

At Toups Capital Advisors, we can help you establish a trust. While we are not lawyers, we can connect you with the right legal team and advise you during the process. We also have established relationships with outside independent trustees who cost as little as $3,000 per year.

Contact us today to talk through a possible trust strategy.