Within the recent drama around Viacom founder and Chairman Emeritus Sumner Redstone was a threat by the 93-year-old of a lawsuit against two former companions alleging elder abuse that would seek to recover more than $150 million in gifts made to them. The high stakes of the larger Viacom/Redstone situation—the sums of money in play are significant and the fate of a trust controlling the multibillion-dollar corporation hangs in the balance—make for fascinating if somewhat sensational reading. From a wealth-planning perspective, however, the elements that touch on Redstone’s continued ability to manage his money at a vulnerable life stage may underscore for many the potential benefits of establishing a system of checks and balances (both for ourselves and for heirs) to protect assets and those they are intended to benefit.
Given today’s high federal gift and estate tax exemption amounts ($5.45 million per individual, $10.9 million per couple in 2016), one of the most common questions we hear from clients is, “Why bother with trusts?” While it’s true that federal gift and estate taxes are no longer a concern for many families (state estate and gift tax laws vary by state and not all states match the federal exemptions), trusts can perform other critical functions within an estate plan. By allowing you to specify when, under what circumstances, how and to whom assets will be distributed or used for, trusts can achieve a variety of goals, including protecting assets, alleviating the burden on beneficiaries of day-to-day financial management and facilitating transfers to those who are incapacitated. The following are nine key non-tax reasons to consider a trust as part of your estate plan:
IRA Considerations
When you name an individual as beneficiary of your IRA, that person has the authority to withdraw the entire balance at one time. This access can have significant tax implications, but, further, if the beneficiary is incapacitated, a spendthrift, a second spouse or someone unable or uninterested in managing their finances, your wishes may not be achieved. Naming a trust as the IRA beneficiary instead of an individual allows you to protect the assets from creditors or the beneficiary, or provide a structure to make sure the assets are distributed in accordance with your wishes.
- Protect minor children or heirs with disabilities
One of the most common reasons to create a trust is to hold assets on behalf of minor children (or other beneficiaries) who are unable to hold them in their own names. In the absence of a trust, assets left to your minor children after your death will become subject to the control of the court—a situation that generally is preferable to avoid. If you have children facing other disabilities, including addiction issues, mental illness or other medical issues, they may also benefit from having assets held for them in trust on a temporary or permanent basis. - Provide support for spendthrift heirs
If you have a child (or other beneficiary) who lacks prudent money management and budgeting skills, a trust can be a way to put an intermediary in charge of protecting the assets and helping to ensure that the assets remain available for a set period of time or throughout the child’s life. Also, if you name the beneficiary as a co-trustee, the beneficiary can feel involved in his or her own future and perhaps learn prudent financial skills. - Protect assets from creditors
When you create a trust for a beneficiary, those assets are generally protected from creditors. This protection is one of the key benefits of a trust, and is particularly useful if you have beneficiaries who work in fields that experience higher rates of liability lawsuits, for example, doctors or those who serve on corporate boards of directors. Should a beneficiary lack sufficient liability insurance, a trust can also protect assets from liability stemming from an accident. Also, assets held in trust generally offer protection in the event of a divorce. - Provide lifetime support for a surviving spouse, but leave assets to children from a previous marriage
In blended families, it’s common for a spouse to want to provide support for a surviving second spouse throughout his or her life, but ultimately leave assets to children from the first marriage. If you leave assets to a surviving spouse outright, you run the risk that the spouse may then leave the assets to his or her own children or a new spouse, thereby removing them from the family. A trust can provide the support for your spouse throughout his or her life and then provide that any remaining assets pass to your children. Because the interests of your surviving spouse and children are at odds in this scenario—your spouse wants to maximize the funds he or she receives while your children want to preserve the assets for their inheritance—it sets up a conflict that can require the trustee to tread carefully to avoid disputes. For this reason, the selection of your trustee is a critical decision. One option is to consider a corporate trustee or co-trustee who can help navigate these delicate situations as they arise. - Ensure that your assets pass to grandchildren or more remote descendants upon a child’s death—and not to your child’s spouse, friends or favorite charity.
Depending on the size of your estate and the amount you intend to provide to heirs, your trust may endure over multiple generations. Similar to the previous example, if you want to provide for your children during their lifetimes and then ensure that the assets stay within the family after their deaths rather than pass to surviving spouses, friends or charity, your trust can provide that any remaining assets pass to grandchildren or other descendants that you select. - Provide ongoing support to surviving spouses
Often in a marriage, one spouse handles much of the day-to-day financial management. When that spouse is the first to die, the surviving spouse may not want to or may not be capable of taking up the household financial reins. In such cases, a trust allows for the trustee, or another appointed person or entity, to take over asset management responsibilities or oversight, as well as more mundane bill-paying and recordkeeping tasks, while providing the surviving spouse with support. Additionally, the trust can protect the assets if the surviving spouse decides to remarry. - Benefit individuals for a set period, then pass remainder to charity
If you are charitably inclined, a charitable trust can provide for both family members and causes you would like to support. For example, a charitable remainder trust can provide income to a beneficiary, such as a surviving spouse, for a set period of time, and then pass the remainder to a qualified charity. There may be tax benefits associated with these types of trusts. - Delay knowledge of wealth until a certain age
For a variety of reasons, you may decide to withhold knowledge of a future inheritance from your children or other heirs for a period of time. Generally, a trustee must advise a current beneficiary of his or her interest in a trust. In certain jurisdictions such as Delaware, however, you can create a trust with the condition that the beneficiaries not be notified of their interest in the trust until a specified time, such as attaining a certain age. - Provide a structure to manage your assets if you become incompetent
Most relevant to the Sumner Redstone example above, you can establish a trust to manage your own assets in the event that you become incapacitated. Unlike the trusts we discuss above, which are irrevocable, in this case you can employ a revocable trust, which could be used in place of a power of attorney and, in some cases, may be an easier solution. In the event that you become disabled, the trust can provide that a successor trustee steps in with the full authority to manage the assets of the trust, provide for your support and manage your financial affairs.
Set Your Own Terms
Serving as more than tax optimization vehicles, trusts can offer you a flexible way to direct how your assets are distributed to your loved ones, and can provide a means to protect assets for beneficiaries from potential predators, and from themselves. Should you become incapacitated, a trust can assist you in the management of your assets on a temporary or permanent basis. You can give beneficiaries as much or as little control over the trust as you feel is appropriate—for example, being a co-trustee or giving them the power to remove and replace trustees. The terms of the trust generally are established as part of your estate planning process and can be funded upon your death or during your lifetime as you select. An estate planning attorney can work with you to determine how a trust may fit into your estate plan.