As a financial advisor, understanding the benefits and importance of trusts for your clients can greatly enhance their financial security and help achieve their long-term goals.
In this article, you’ll discover:
- Why trusts are not just for the affluent, but can be valuable tools for individuals of all financial backgrounds
- The differences between trusts and wills, and the advantages trusts offer
- How the two main types of trusts work – revocable and irrevocable
By gaining a deeper understanding of trusts, you can make informed decisions about incorporating them into your estate planning strategy for clients.
1. A trust enables individuals to better control their assets.
And this isn’t just after their passing, either – a trust can be used during a client’s life. Establishing a trust provides a safety net, ensuring that assets are used in accordance with the creator’s intentions. A trust’s creator, or grantor, essentially transfers assets to a trustee, who manages the assets on behalf of the beneficiaries—and does so by following the guidelines outlined in the trust.
Trusts are beneficial for various reasons. They offer:
- A way to potentially avoid probate
- A smoother and more efficient transfer of their wealth to beneficiaries
- Potential protection against creditors, shielding assets from potential claims and lawsuits. The flexibility to allocate assets to beneficiaries in a manner that aligns with their values and long-term goals. The ability to provide for specific needs, such as education, healthcare, or even charitable causes
2. There are two primary types of trusts: revocable and irrevocable.
Revocable trusts, also known as living trusts, offer flexibility and control during the client’s lifetime. Clients can modify or even revoke the trust while they’re still alive. Assets placed in a revocable trust remain part of the client’s estate and are subject to estate taxes. However, a revocable trust does avoid the probate process.
In contrast, irrevocable trusts are permanent and cannot be altered or terminated without court approval. Once assets are transferred to an irrevocable trust, they are most often no longer considered part of the client’s estate and are not subject to estate taxes. Irrevocable trusts provide greater asset protection and can be used for estate planning strategies, such as minimizing estate taxes and providing for specific beneficiaries.
The decision of which type of trust to establish depends on your clients’ individual circumstances and financial goals. Revocable trusts offer flexibility and control, while irrevocable trusts provide greater asset protection and estate planning benefits.
3. Trusts are not solely reserved for the affluent.
They offer a wide range of benefits that can be advantageous to individuals of all financial backgrounds. Establishing a trust serves as a proactive measure to safeguard your clients’ assets, ensuring they’re managed and distributed according to their wishes, even when your clients are no longer able to do so themselves.
Contrary to popular belief, trusts are not exclusively reserved for the rich and famous. While trusts are often associated with affluent individuals looking to protect their assets and pass down wealth to future generations, they can also be a valuable tool for people of more modest means.
Trusts can be used to manage and distribute assets, provide for the care of loved ones, and even minimize taxes and potentially avoid probate. Ultimately, trusts can benefit anyone looking to protect and manage their assets, regardless of their financial status.
4. Trusts and wills do different things for clients.
While a will is an important estate planning tool, it’s not designed to offer certain protections available under a trust. For instance, one key difference between a will and a living revocable trust is that the living trust has an incapacity clause that states who your clients want to manage their affairs in the event they are unable to do so during their lifetime. The primary function of a will is to determine to whom or what assets titled in an individual’s name are conveyed. A trust can actually disperse those assets to beneficiaries over a more reasonable period of time or at certain ages. Wills are necessary to designate who gets what, but trusts can actually help protect your clients’ assets, reduce their tax obligations, and define the management of their assets according to their wishes.
5. There are many factors to consider when deciding if a trust is right for your clients.
Some of those factors include age, health, marital status, and financial situation. A trust can be useful if your clients have one of the following wishes or attributes:
- Have a complex financial situation
- Want to leave a legacy for their loved ones
- Would like to protect assets from creditors, nursing home costs, and other potential threats
- Provide for loved ones in the event of death or incapacity.
6. Addressing trusts with your clients.
Even if you’re not an estate planning attorney or an expert in estate planning strategies, bringing up topics like trusts can help ensure your clients are thinking through all of their goals – and help you formulate the right financial strategy for them. Plus, addressing trusts with clients can demonstrate your value as much more than an investment manager, but highlight your capabilities as a wealth manager.
If your clients do want to create a trust, you can then bring in an estate planning attorney to create a trust that addresses their specific needs.
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