In general, trusts are very valuable estate planning tools. A Family Wealth Trust can be used, not only for making estate administration simple and easy, but also for safeguarding the family’s legacy. They can be useful in regulating a younger heir’s access to assets and in providing long-term oversight and management of investments. The trustee of a Family Wealth Trust will be responsible for investing your assets and making sound decisions when it comes time to make distributions to your beneficiaries.
The primary goal of asset protection is to shelter the wealth you have accumulated from unnecessary risks. A family wealth trust can be a very effective and flexible option for doing just that. Regardless of the value of your estate, you should consider asset protection for, and creating an estate plan that will ensure your family wealth will be passed on to your loved ones.
What Is a Trust?
A trust is simply an agreement between three parties: the trustor, the trustee and the beneficiary, regarding to whom the property will be transferred. The “trustor” is the person who owns the assets in, and creates the trust. The “trustee” is the person who manages the assets of the trust. The “beneficiary” is the person who gets the benefit of the assets after certain conditions are met. Initially, the trustor will likely be the beneficiary, but at the death of the trustor, beneficiaries will be named in the trust agreement to receive the assets. There are few limitations on who can serve as trustee. Commonly, trustees are the trustor, and when the trustor can no longer act as trustee they will be succeeded by trusted friends or relatives of the trustor. They can also be professionals, such as accountants or attorneys. A corporate trustee can also serve as trustee for a family wealth trust.
How can Family Wealth Trusts provide protection for assets?
Family wealth trusts become irrevocable at the death of the trustor, which simply means the terms of the trust cannot be changed. Also, when the trust is created, the assets are permanently removed from the trustor’s estate, in order to be placed in the trust. So, when the trustor passes away, the assets in the family wealth trust are passed on as trusts to the beneficiaries who, in many cases can also act as their own trustees. When the beneficiary dies, the inherited assets are not considered part of the beneficiary's estate. This also means those assets will not be subject to estate taxes, which can be a huge benefit in protecting family wealth.
What is the benefit of a Generation-Skipping Trust?
Another option to consider in family wealth planning, is the Generation-Skipping Trust. If you transfer your property to a grandchild, instead of your daughter or son, that transfer could be subject to a specific tax referred to as the “generation skipping transfer tax.” The generation skipping transfer tax is a tax assessed on property as it is passed on to a generation that is two or more levels below the generation actually transferring the property.
The Generation-Skipping Trust, also known as a “dynasty trust,” is designed specifically to avoid, or at least minimize, taxes on transfers to subsequent generations. This can be accomplished by holding the assets in the trust and distributing the funds in a pre-defined way to each generation. Consequently, the entire amount of the trust will be protected from estate taxes with each passing generation.
These trust provisions are somewhat sophisticated and require careful planning, but can be significant if they are properly prepared.