Trust fund kid. The term conjures up images of entitlement, snobbery, and pastel golf shirts. Daddy’s spoiled little brats account for only a little more than 1% of the U.S. population (there’s that maligned 1% again). When compared to the approximately 22% of Americans who inherited money, those who did so via a trust fund are an especially small minority.
That doesn’t mean the demographic should be ignored, especially in the current climate. Baby boomers — the country’s wealthiest generation — are expected to transfer $30 trillion to Gen Xers and Millennials over the coming decades, according to CNBC. That means millions of young people will, expectedly or unexpectedly, come into significant wealth. As an estate planning attorney, you need to be ready to capture this demographic.
Trusts, despite their negative connotation in the public consciousness, are extremely useful estate planning tools for individuals looking to preserve and transfer assets. Additionally, they’re not just a tool of the ultra-wealthy and should be an integral part of your estate planning practice. Here’s why.
What is a trust and why is it useful?
While most Americans consider wills the de facto estate planning tool, trusts have additional benefits that may fit many of your clients. Deciding on which is best for your client is a key step in the estate planning process. Let’s get the basics out of the way:
- Wills. A will is a legal document that directs the distribution of assets after death. Wills are subject to probate, or the court-supervised collection and distribution of assets.
- Trusts. A trust becomes valid upon execution. You can place any number of assets into the trust, including cash, stocks, or real estate. In the case of an irrevocable trust, once you place the assets in the trust, you lose control of the assets, which then fall under care of a trustee, such as a bank or attorney.
Trusts have many added advantages. When executed properly, most trusts will avoid estate and gift taxes, as well as probate. Trustors can also set stipulations for use of a trust, like restricting distributions to purchasing a home or financing education. Trusts can also help clients:
- Designate a guardian for children
- Ensure homes are transferred to designated beneficiaries in the event of death
- Keep a business in family hands throughout generations
- Protect family assets in the case of future divorces
- Maintain privacy of assets since trusts are not public records
Many parents, regardless of wealth, worry about spoiling their children. For those parents who have amassed great wealth, the concern often shifts toward funding the lives of idle rich children who aren’t motivated to work or further their education. While trustors will want to give their beneficiaries every opportunity, trusts can be crafted in a way that incentivizes education and hard work.
Incentive trusts impose restrictions on distributions. For example, an incentive trust might require beneficiaries to graduate from college or even achieve a certain grade point average in order to receive money from the fund. They could require employment or charitable work, and reduce or cut off distributions for beneficiaries who fail to meet the requirements.
Incentive trusts have become increasingly common, but they’re not without their drawbacks. It’s nearly impossible for the trustor to foresee future problems, including medical emergencies or financial hardships, which might affect the trust’s stipulations and require greater financial distributions.
Regardless of your clients’ levels of wealth, trusts are a useful tool for facilitating the control of assets. WealthCounsel’s estate planning software can streamline the creation of trusts and help protect your clients’ assets. Download our irrevocable living trust sample to see how your practice can automate document creation with Wealth Docx.