John Morton
What is a trust?
A trust is a legal instrument to hold and control assets. Anyone with assets – not just the wealthy – should consider creating a trust to use during life, known as an “inter vivos” or revocable living trust. This trust would hold assets during someone’s life for his or her use, and then direct who inherits the assets too. Alternatively, someone could consider including a provision in their will to create a trust after death, known as a testamentary trust. There are other types of trusts as well, all with unique purposes, but all trusts are useful for determining how and when beneficiaries receive or have access to assets.
What is a trustee?
A trustee holds the legal title of and administers the affairs of a trust. If a living trust is created, the trustee and the grantor (trust creator) are the same person. The trust creator has simply placed their assets inside a trust for benefits such as privacy, outlining beneficiaries, and estate tax minimization, among other reasons. He or she can amend or revoke the trust while alive. If someone is incapacitated, has passed away, or set up an irrevocable trust, the trustee is a separate person or organization that holds a fiduciary responsibility to carry out the trust creator’s wishes and directing trust income or trust assets to the beneficiaries of the trust. When a trust is created, these trustees are identified.
Tip #1: Always have successor (back-up) trustees in your trust document. Additionally, know that organizations such as banks can serve as corporate trustees, but having a friend or family member as a successor trustee(s) will help reduce costs and retain more assets for the beneficiaries.
What are some benefits to having a trust?
As stated previously, a frequent attraction is having control over assets after death. For example, a trust could hold assets for a beneficiary until they are a certain age. As another example, a trust could place restrictions on distributions (like for a second marriage or a spendthrift child).
Tip #2: Another estate planning document, a “last will and testament” (usually referred to as “a will”), directs who receives assets but does not allow any control over those assets.
Trusts can also help protect an heir’s inheritance against creditors or divorce. Most states, like our neighbor Illinois, are common law states and in the event of a divorce, the assets are split equitably (not necessarily equally). Wisconsin is a community property state, where marital assets are considered to be jointed owned and thus split equally. In both cases, inherited assets are typically excluded if proper steps are followed.
Tip #3: Passing along assets to children in a properly structured trust makes it more likely that those assets are safeguarded in the event of a later divorce.
For larger estates, an estate plan with the right pieces can help pass more wealth onto the next generation. There is a 40% federal top tax rate on estates above the exemption amount (currently about $26M for a married couple but that is scheduled to cut in half starting January 1, 2026). Each state is different – Wisconsin does not have an estate tax but Illinois imposes a tax on an individuals’ estate above $4M.
Tip #4: You can’t avoid the tax man. But there are legals rules and structures that can allow for greater wealth transfer to future generations. We’ve helped clients structure their estate plan with an attorney to help reduce their expected estate taxes by six- and seven-digit figures.
Minors cannot receive assets as a beneficiary of a will, retirement account, or insurance policy, so setting up a trust to hold assets until a child can legally access the funds is the best route to avoid a probate court getting involved.
Tip #5: A trust should be used when minors are the estate’s beneficiaries.
Wait, what’s probate?
When someone dies, a court reviews that deceased person’s assets and estate planning documentation, like a will, to determine who inherits those assets. With attorneys and courts involved, this process will take time and can be very expensive. At a minimum, it’s likely to cost $5,000-10,000 but complexities could easily multiply that cost several times over.
Tip #6: While a comprehensive estate plan, including trust documents, can cost more than $3,000 there are many benefits for the family, including saving on legal fees during probate!
How can probate be avoided?
If done correctly, a revocable trust and proper estate plan can reduce or eliminate an estate’s interactions with probate court. A major downside to just having a will, even if a testamentary trust is written into the document, is that pesky court proceeding called probate still must occur. Eventually, the probate court would fund the trust with a deceased person’s assets, but that can be a lengthy and expensive process as mentioned earlier.
Tip #7: It usually makes sense to invest in setting up a living trust along with a will. Having a will (even with a testamentary trust) does not avoid probate.
Along with a revocable living trust document, there are several other “areas” to button up in order to have assets pass to the desired heirs and avoid the costly probate process. Here a list to consider:
- Beneficiaries on life insurance and retirement plans
- Pay-on-death (POD) beneficiaries
- Transfer-on-death (TOD) beneficiaries
- Jointly owned property
- Power-of-attorney documents
Regarding these beneficiaries, titling, and documents, here are two other tips:
Tip #8: The first four items transcend a trust or will document. That’s right: that hastily filled out beneficiary form for your first job’s retirement plan would dictate who receives those assets if the money was left there. If you’ve made changes to your will and trust beneficiaries, don’t forget to update everything else too.
Tip #9: If you’re incapacitated, a trust document isn’t helpful for assets not owned or governed by the trust. In the event of incapacity, a power-of-attorney document would outline who is responsible for making financial decisions for non-trust assets. Without that document, the next of kin and courts would determine who carries that responsibility.
Boardwalk Financial Strategies is highly involved in all aspects of our clients’ financial situations. A comprehensive estate plan and proper implementation gives our clients peace of mind and helps align their values, goals, and wealth. We help with our clients work with an estate planning attorney to create the right instruments and periodically review them.
Tip #10: Having an estate plan isn’t enough. It must be properly implemented. We help our clients “button up” their insurance policies, retirement accounts, bank accounts, investment accounts, real estate, privately owned businesses, and other assets so that their wishes are followed, the right beneficiaries receive assets, and their family saves money by reducing or avoiding probate.
At Boardwalk Financial Strategies, we are a team of advisors with strong estate planning backgrounds. This allows us to build comprehensive financial plans for our clients that serve them beyond their own lives. If you would like to learn more about our comprehensive wealth management services, please contact us today.
