Trusts – an Essential Resource for Family Financial Planning

As families accumulate wealth, trusts offer protection, growth, and efficient transfer from an individual (or grantor) to beneficiaries. While previously thought to be reserved for the ultra-wealthy, trusts are an excellent financial planning resource and are gaining popularity among the broader public. Today, we review how trusts may help families prepare for a multitude of life events and build wealth for generations to come.

What is a trust?

A trust is a legal agreement establishing how assets will pass from one owner to another when certain conditions are met. While a will can achieve the same goals in death, trusts allow for transfers in both life and death, with the added benefit of allowing further conditions for beneficiaries to access the assets.

Sense of Control

Trusts offer greater control over how and when wealth is distributed to beneficiaries. When dealing with complex family dynamics, this can be one of the greatest benefits to many families. Children and/or grandchildren are often in different phases of life with different levels of needs, maturity, and ability to manage access to wealth responsibly. Individuals establishing trusts can select the age of financial maturity that works specifically for their family’s long-term goals.

A trust can have an independent trustee work alone or alongside the beneficiary, limiting a beneficiary’s access to wealth. A beneficiary may never receive full and unrestricted access or become the sole trustee at the age of financial maturity. The trust can distribute a minimum dollar value or percentage of the trust assets to the beneficiary annually, or may not require distributions for beneficiaries. When consistent and recurring distributions are not included in a trust agreement, another very common condition is what is referred to as the HEMS standard refers to the “health, education, maintenance, and support” in which trust agreements will include language allowing for distributions at a trustee’s discretion to help family members attend college, pay for medical expenses, and help beneficiaries purchase or improve their homes. This language is intentionally broad, allowing for a trust to support family members long beyond the grantor’s life.

When giving assets to others, there will never be complete control, but trusts allow for the transfer of wealth through families while honoring the grantor’s values. 

Wealth Protection

Another popular driver for individuals considering trusts for family financial planning is preserving and protecting wealth. Trusts allow families to shield assets from external risks, like creditors. As discussed above, a well-structured trust is the owner of an asset, with the trustee acting as an intermediary between the trust assets and the beneficiary. When a beneficiary does not have direct and unlimited access to the underlying trust assets, the trust assets are not included in the beneficiary’s net worth, which is an important detail should a beneficiary be named as a liable party in a lawsuit. In divorce, a grantor utilizing trusts in family financial planning can establish a trust that will pass through to their children, grandchildren, and beyond. In the event of death or divorce of the individual’s heirs, the trust will help ensure assets pass through the family line and are not included in the division of marital assets.

Tax Savings Strategies

Taxes are essential in any financial planning strategy, and trust planning is no exception. Gift and Estate Tax and Income Tax are impacted when discussing trusts for family financial planning. Gift and Estate Taxes are those imposed on the transfer of wealth (in death and life). At the time of this article, an individual can gift a total of $13,990,000, be it in life or at death, before gift or estate taxes are imposed¹. Funding a trust can provide long-term family planning benefits by increasing family wealth in a vehicle that is not subject to estate tax in the future. While trusts follow a separate income tax table, there are several income tax planning strategies for trusts and beneficiaries.

Trusts provide many benefits for families working on long-term financial planning. Trusts allow the grantors to support family members in a way that honors their financial values throughout the life of the grantor and for generations to come.

Tax law is continually changing, and each family’s needs will differ.  Be sure to work directly with a legal or financial professional to find the best solution for your family.

¹ IRS.gov, Rev. Proc. 2024-40 § 2.41