7 Trusts All High Net Worth Estates Should Consider
By: Barry E. Haimo, Esq.
August 19, 2021
Estate planning can be challenging — especially for those with a high net worth. You want to protect your family, assets, and business, and gain the peace of mind of knowing you’re prepared and in control.
But the process tends to be complicated and time-consuming because there are so many things for high-net-worth estates to consider. If you’re in this position, you want to protect the inheritance to your heirs, reduce the amount of estate taxes you have to pay, and avoid going into probate. Worse, the landscape changes so rapidly in estate planning, it can be hard to keep up.
Luckily, there are some trusts that can help to accomplish these things — and more! Below, we’re going to cover seven trusts that all high-net-worth estates should consider.
First, though, it’s important to understand how trusts work in general.
What Is a Trust?
At its core, a trust is merely a fiduciary relationship where there is a trustor and a trustee. The trustee has the right to hold the assets or property of the trust for the benefit of a third party.
Trusts help to provide legal protection for the assets of the trustor. They can also help to simplify the process legally to distribute funds according to the trustor’s wishes and reduce estate taxes or even avoid them altogether. This makes them a valuable tool in estate planning.
Seven Types of Trusts for High Net Worth Estates
For high-net-worth individuals, there are several trusts to consider. These include:
Intentionally Defective Trusts
This estate planning tool effectively freezes assets for estate tax, but does not do so for income tax. The grantor will pay income taxes that are generated by the trust instead of them being paid by the trust itself.
This results in you being able to retain more assets for any heirs since the trust does not have to pay its own taxes.
Revocable and Irrevocable Trusts
Revocable trusts can be changed after they’re formed, but irrevocable trusts cannot in most cases. Some people like revocable trusts because they are flexible. They still help to avoid probate and court control of assets should you become incapable of handling them yourself.
An irrevocable trust can be set up in a way that protects life insurance policies, which is why many people like them. If you use an irrevocable trust for this purpose, then you have no control of life insurance, so those proceeds are paid outside of the estate and not into it. If done properly then this strategy can help to avoid estate taxes.
Charitable Lead Trust
A charitable lead trust is paid to a charity of your choosing for a fixed number of years. After the period specified by the trust ends, assets will pass on to the beneficiaries, who will then pay lower taxes on it as a result.
Charitable Remainder Trust
This type of trust allows a beneficiary of your choosing to receive income for life, or for a specified number of years. Once that time frame is up, the remainder of the assets are distributed to a charity instead of the government or your heirs. These are often created as part of an overall estate plan to help reduce or prevent taxes. This type of trust is useful for those with a high net worth because it allows a person to sell assets that are highly appreciated, such as real estate, to a charity after their death. Prior to that, however, income is still earned from the trust.
This trust allows you to transfer money to a trust for your child to avoid gift taxes. Your child will have a limited amount of time to take the gift from the trust. If they take it as a gift immediately, then it can count as part of your annual gift limit, which goes against the lifetime estate tax exemption. If they don’t take it as a gift, it becomes part of a trust.
This is a trust that allows the assets to skip the generation right below the trustor and pass directly to that generations’ kids, usually the trustor’s grandkids. The purpose of this type of trust is to avoid the assets being taxed twice. These trusts are irrevocable, so once the money is transferred to the trust, it can’t be taken back out.
Grantor Retained Trusts
There are a few kinds of grantor retained trusts, such as a grantor retained annuity trust (GRAT), a grantor retained unitrust (GRUT), and a grantor retained income trust (GRIT). But for all types, this trust allows a grantor to to receive some kind of benefit from the trust for a specified number of years. Then, the assets are distributed to the remainder beneficiaries.
Including trusts in your estate plan can be complicated, but don’t let that keep you from leaving your legacy. Call us to get started today at 954-228-3369.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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