She’s not alone in her concerns. While trusts can be powerful and versatile financial solutions, many myths surround them. Especially at a time when it’s hard to know what might be next for the economy, it’s important to dispel these misconceptions to fully understand the benefits trusts can provide. “The role trusts can play in planning, especially in a time of uncertainty, make them an extremely relevant and valuable resource today,” says Courtney Kelch, a senior trust officer at Bank of America Private Bank in Houston.
A common belief about trusts is that once you’ve set one up, you’re essentially giving away any role in managing its assets. Some people also believe, not necessarily correctly, that trusts are permitted to invest only in the most conservative asset classes. Another misconception: They will have no recourse if their beneficiaries fail to use the trust’s assets wisely. “It seems like everyone has heard a bad story about trusts,” says Kelch. “Someone may have had a hard time accessing their money; someone else may have lost some control of their assets. But if your trust is set up correctly, those things can be avoided.”
Kelch adds that trusts are flexible and can offer variable levels of control for the grantor, and can be written to ensure nothing comes between the individual’s wishes and the way their trust is executed. Here are examples of what well-executed trusts can help you do.
Maintain protection and control
After years of hesitating, the owner of the private equity firm was finally convinced that a trust could benefit her children and grandchildren by removing assets from her estate, while reducing her family’s exposure to potential lawsuits, creditors, divorces, taxes and those who might prey on the wealthy. The results turned out to be beneficial for everyone. And because the trust was established in Delaware, a state that allows for what’s called bifurcation of management, the owner was able to maintain a degree of control over the assets while keeping them outside her personal estate.
She was able to choose exactly which assets to transfer into the trust — those she thought would appreciate the most — and in doing so created more wealth for the trust beneficiaries than she expected, says Jennifer F. Galvagna, a market trust executive at Bank of America Private Bank in Boston. “There was so much appreciation that she almost started second-guessing herself, suggesting, ‘Did I just leave them with too much?’”
Enjoy business succession — on your terms
After spending years building their manufacturing firm from a scrappy regional supplier to an important national presence, a pair of equal business partners in the Mid-Atlantic knew by 2014 that they would have to start planning for their own retirement and their privately held company’s future. However, they realized that selling the business would not only result in a huge tax bill, but also likely leave them each with an estate subject to hefty estate taxes.
But as Galvagna notes, “Trusts can offer many ways to smooth business succession and sale planning — while often minimizing the impact of a taxable event.” With the help of Bank of America Private Bank, the partners worked with their attorneys to establish family trusts, then each partner transferred 30% of the company into his family’s trust. Each of them paid gift tax on the appraised value of the transfer. When the partners sold two years ago, the final price ended up being far more than what the company had been appraised at five years earlier. Much of that substantial upside went to the family trusts without additional tax, Galvagna says.
Manage special circumstances
Kelch recalls a couple whose daughter suffered a stroke as a young adult. After she stabilized, it became clear that she’d have disabilities that would require ongoing assistance. Although she had enjoyed a successful career before the stroke and wasn’t completely incapacitated, her future wellness and ability to take care of herself were far from certain.
The parents, of course, worried about her care. While their estate plan already left substantial assets to the daughter, they decided to establish a trust so that they’d be sure her inheritance would pay for her physical needs. The trust made provisions for a home caregiver as well as covering her continuing medical expenses. After the parents died, a cousin took over as co-trustee of the trust — and now works closely with Bank of America to ensure that the daughter will have everything she needs.