Wealth Insights

Be Nimble with Your Trust Strategy

Flexibility is essential to provide for your continued needs and those of your dependents.

As the priorities in your life change, so, too, do your financial priorities.

Inheritances, investment windfalls and career success can significantly boost the size of your estate. At the same time, children, grandchildren and multiple marriages can expand the number of dependents and cherished family members you wish to include in your plans for the future.

At many stages of life, trusts, long valued as tools to ease tax burdens, can aid individuals in estate planning, according to Barbara P. Screven, an Estate and Trust Planning Specialist with Regions Private Wealth Management.

“Trusts are now useful in so many ways that you can’t pinpoint a time when it’s most appropriate,” Screven says. “Someone who receives an inheritance early and doesn’t have kids may want to use a trust to provide for a spouse. Another person may have a child with a health issue and want to set up a specialized trust to ensure that the child is cared for through his or her entire life. It really depends on the circumstances for each individual person.”

A Legal Shield

Screven says that trusts have three key attributes:

• Privacy: A trust generally does not become part of the public record like a will may.
• Protection: A trust may help shield and protect assets from lawsuits and creditors.
• Enhanced control: A trust allows for explicit instructions with regard to assets and beneficiaries.

In addition, certain trusts may provide for the tax-free or tax-deferred passage of assets. That might be beneficial for assets that are being transferred to anyone who is not the individual’s spouse, to whom an unlimited amount of assets may pass tax-free.

Some form of trust laws has existed for hundreds of years. In the U.S., the value of assets that may be passed along tax-free to non-spouses is set by the government—in 2022, the federal gift and estate exemption limit for individuals was $12.06 million and in 2023, it is $12.92 million. Those amounts double for married couples. Many trust-related rules are set at the state level.

Help Ensure an Enduring Legacy

Generally, Screven says that a simple will may be enough for young married couples with no children and modest assets, but once a child arrives or their wealth grows, it’s smart to consider a trust.

For example, once that couple owns a home, acquires life insurance and starts building up retirement savings, instructions for such assets are invaluable. This is especially true for a surviving child (or children) who will need care and support through young adulthood.

As time goes by, the couple’s assets may grow quickly due to job- or investment-related successes or an inheritance, while the needs of the children will tend to expand. In addition, a reluctance to leave assets to a child outright may emerge. In such cases, a spendthrift trust can control future distributions. Meanwhile, providing for the immediate needs of a second spouse and future distributions to children from a first marriage may be handled through a qualified terminable interest property (QTIP) trust.

Retirement brings a host of other considerations, including providing ongoing care for offspring with health, mental or substance abuse issues—all of which may be addressed in a spendthrift trust. Survivor spouse provisions should be spelled out, as should the passage of assets to grandchildren and great-grandchildren.

For families possessing significant wealth, the federal estate tax exemption may be insufficient for navigating estate taxes. At one time, passing assets to grandchildren and great-grandchildren allowed estates to sidestep such taxes, but in 1986, the federal government enacted the generation-skipping transfer (GST) tax to close that loophole. Nonetheless, current laws allow for a separate GST tax exemption of $12.06 million in 2022 and $12.92 million in 2023.

Fortunately for wealthy individuals who wish to support future generations, the perpetual trust was developed. This approach, more commonly known as a dynasty trust, allows for assets to grow tax-free within the trust and distributions to be made to multiple generations. This is an irrevocable trust that can exist for multiple decades—for example, in Alabama, a dynasty trust may remain intact for up to 360 years.

“Your strategy for using trusts changes greatly over time, based on your needs, your beneficiaries’ needs and the amount of assets you have,” Screven says.

Tread Carefully

The trust landscape is complicated. As a result, a poorly designed trust can actually erode an estate’s value and diminish the ability to achieve your long-term goals and objectives.

To help preserve the integrity and intent of the document, Screven offers three recommendations:

• Choose a knowledgeable trustee: Laws, regulations and tax-exemption details can be fluid, so enlist someone who will continue to be well-versed in the intricacies.
• Allow for flexibility in execution: A trustee may need to adjust to altered laws and regulations, so the trust language should provide for that.
• Allow for latitude in distribution wishes: Because no one knows what the future holds for your family, instructions that are tightly defined today might be of limited value down the road.

“Especially with dynasty trusts, we’re talking about long-range time frames in which we’re trying to defer transfer taxes over many generations, so it helps to be as flexible as possible in many ways,” Screven says.

Talk to Your Regions Wealth Advisor About:

1. About how a trust strategy can fit into your estate plan.
2. Whether there are any beneficial rules in your state that would make a trust essential to your plan.

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