Selecting trust structures based on assets

Tab 1

November 27, 2017


Personal trusts, once the exclusive province of a small subset of the ultra-wealthy, have surged in popularity since the 1990s. It’s not surprising: The aging of America’s baby boomers has fueled an explosion in wealth transfer, with $30 trillion projected to be handed down to heirs over the next three decades1. Meanwhile, the liberalization of trust laws, most notably in Delaware, Nevada and South Dakota, has made trusts more versatile and more widely available to families with long-range legacy goals.

 

A key result of these shifts in the trust landscape has been a heightened emphasis on designing, structuring and administering trusts based on the types of assets they hold. “It’s an important consideration,” says Daniel Wani, Arizona and Nevada Market Leader for U.S. Bank Private Wealth Management. “Yet it is often overlooked by families and advisors.”


As Wani explains it, different assets have different administrative and maintenance needs. A stock-and-bond portfolio, for example, will be managed differently from an oil-and-gas lease, intellectual property or a family business. “Twenty years ago, certain considerations fell outside the purview of trust and estate advisors,” he says. “Assets were managed and maintained primarily at the entity level, regardless of whether or not they went into a trust.”

Photo by Meaghan Curry/Stocksy

Giving asset types their due

Today, that approach could cost a family a significant opportunity to maximize the unique benefits of a trust. “The more weight we give to the specific asset type and its long-term goals, the more we’re able to tailor a trust vehicle to the family’s estate planning and legacy needs,” Wani says.

 

To be sure, the case for choosing a trust structure according to its constituent assets applies primarily to irrevocable trusts. “Most families are actually well-served by a revocable trust, which keeps their estate out of probate and enables them to fulfill a variety of long-range goals,” Wani says. “All of the family’s assets can be titled to a revocable trust — plus the grantor has complete freedom to change or even revoke the trust.”

Tab 2

November 27, 2017


An irrevocable trust offers no such flexibility: Generally speaking, once the trust agreement is finalized, there may be no going back. However, this option yields an array of potential tax benefits and succession planning advantages, allowing families of significant means to establish a legacy for generations to come.

 

Sally Mullen, Chief Fiduciary Officer for U.S. Bank Wealth Management, tells of a family that owned a nationwide retail chain with more than 100 outlets. “They wanted to place the properties in a trust but were concerned about the challenge of managing them, as each property had its own operational and local compliance needs,” she explains. A generation earlier, existing laws would have limited the family’s options. “Now we are able to place the business in a limited liability corporation (LLC) and then transfer units of the LLC into several irrevocable trusts, eliminating the need for a title for active oversight of each individual outlet,” Mullen says.

 

The evolution of directed trusts 

Another change that has broadened the appeal of trusts is the increasing use of directed trusts, in which the trustee acts in coordination with a number of trust specialists — for example, an administrator, investment advisor and a trust protector. “By dividing the responsibilities in that way, the grantor is able to focus the trust with much greater precision on what they want to achieve,” says Rob Ford, Private Wealth Advisor for U.S. Bank in West Palm Beach, Florida.

Another asset-specific trust, the Qualified Personal Residence Trust (QPRT), can be well-suited to baby boomers looking for the best way to transfer title to their home, especially if the home’s value exceeds the estate-tax exemption (for 2017, $5.49 million per person or $10.98 million for married couples). “With a QPRT, you can continue to live in your home while leaving it to your beneficiaries at a deep discount on its actual market value, significantly reducing your estate tax burden,” Mullen says.

 

“Trusts have always been an indispensable estate-planning tool, but it’s important to know that planning options are much more extensive today than they were 20 years ago,” she adds.  “We’re now in a much better position to brainstorm with clients about what types of trusts might work best for them and how they should fund those trusts — for themselves, their children and generations to come.”


1 “The ‘Greater’ Wealth Transfer,” Accenture, 2015.

Categories:
Estate Planning , Financial Planning