Carnegie Investment Counsel Blog

Understanding Trusts: Is Trust Planning Right for You?

Posted by Bob Carroll on Sep 25, 2019 3:56:34 PM



Few financial planning concepts are as misunderstood as trusts. What trusts are and whether you need one are two questions that often arise when talking with a financial advisor. Here are some fundamentals of trust planning: 

First of all, what is a trust?

A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.

Trusts are established to provide legal protection for the trustor’s assets and to make sure those assets are distributed according to the wishes of the trustor. Trust planning may help to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

One critical thing to understand about trusts is that they are legal entities unto themselves. This means they have legal standing in the eyes of both the law and the tax code.

There are two ways to set up a trust. A Living Trust is set up while the trustor or grantor is living. These can be revocable or irrevocable. (We’ll share more on this in another post.) The second type of trust is an After-Death Trust established through a will.


Top Reasons to Establish a Trust

Here are a few of the reasons why you may want to set up a trust:


Reducing taxes in some high net-worth situations

When Congress passed the Tax Cuts and Jobs Act of 2017, they increased the federal estate tax exemption amount from approximately $5 million per person to $11 million per person or $22 million per couple. So, if you and your spouse have less than $22 million, you may be able to get by with a simple will. However, one consideration is that the $11 million federal estate tax exemption is scheduled to drop back to the $5 million range in 2026. Also, don’t forget, some states may impose their own estate taxes.


Protecting minors from accessing their inheritance

An example of when you might use a trust is when there are minors or concerns about unwise spending. In the unlikely event that something happens to both you and your spouse, a trust could be used to hold assets for the benefit of your children under the direction and guidance of a trustee. This structure can help benefit and protect the children.

If there are concerns about a beneficiary making unwise spending choices, a trustee limits the beneficiary’s access to the trust funds.


Avoiding probate court

Married couples often own their homes jointly. When one person dies, title to the home transfers to the surviving spouse.

However, this typical transfer may still require the person tasked with wrapping up your estate to visit probate court to validate and transfer title. If your home is held in a trust, death is considered a non-event: The trust continues to own and maintain your home until it is sold.


Simplifying blended family situations

Trusts can also be useful in a blended family situation or where there is significant family wealth being transferred. It is a good way to preserve and protect assets.

Planning for incapacity

A living trust can allow your trustee to access the assets for your benefit if you become incapacitated. Without it, your family may have to go to court to have a conservator appointed to access the assets to pay your bills.

Reducing poor financial decisions by a surviving spouse

If you have concerns about your spouse’s spending habits leaving nothing for your children, a trust can help prevent that scenario.

Sometimes You Don’t Need a Trust

Often times you may not need a trust in order to accomplish your goal, such as simply transferring financial assets. Since trusts have their own legal status, once created they can be difficult to unwind or change. What seemed like a good idea when you set up your trust may not be optimal in the future.

Many financial assets can be transferred simply through correctly filling out beneficiary forms. Most commonly, one spouse names the other with children or other family members as back-up beneficiaries. This approach works well for most financial assets from bank accounts to IRAs. In other words, you don’t need a trust in these cases.

This article just scratches the surface on the topic of trusts. Consider meeting with a financial advisor to learn if trust planning is right for your situation. An advisor can help you sort out the pros and cons of trust planning. We can also help you get your beneficiary forms in order as well.

We “trust” you will contact us. (Okay, bad pun but we couldn’t resist.)

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Topics: Financial Planning

Bob Carroll

Written by Bob Carroll

Bob Carroll is the Managing Director in the firm’s Cincinnati office. He actively listens and discovers what issues are most important to his client. Bob focuses on the unique financial planning and wealth management needs of his clients and their families. As a Certified Divorce Financial Analyst™, Bob has developed a specialty in helping clients before, during, and after divorce.

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