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The Surprising (And Often Misunderstood) Ways to Protect Your Family Today

Once you debunk the myths, you’ll see that trusts can provide a variety of powerful financial benefits, especially in uncertain times

No one wants to leave their family with an undue burden when they pass away. A large and unexpected estate tax bill, for example, could derail a legacy — even alter the lifestyle and goals of surviving heirs. This worry is exactly what was keeping the owner of a private equity firm in the Midwest up at night. Her business had done very well over the years, growing more than she’d dreamed it would. But with that growth came risk: she wanted to shield her family from the heavy estate taxes her heirs might eventually be responsible for.

While she was aware of the role trusts can play in shielding estates from taxes, she resisted the idea of making the move. Her reasons: She didn’t want to relinquish control of the assets and was worried that her money might not appreciate in a trust.

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, 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 her heirs than she expected, says Jennifer F. Galvagna, 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 percent 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 last year, 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.

“Trusts can add an extra layer of financial security,” says Kelch. “In this case, the parents were able to feel confident that their daughter was going to be taken care of financially. Funds were thoughtfully set aside in case she develops additional health issues.” Because trusts are adaptable, they can be tailored to work for most individual health needs, including difficult situations such as those involving cognitive decline.

Gracefully address complex family dynamics

Today’s families come in a variety of configurations, and are always changing. People divorce and remarry. Adult children from a first marriage have different financial needs than second spouses or young children from a second marriage. Complications can set in very quickly if significant assets are involved, and an estate plan may have to provide different things for different heirs at different stages in their lives. A trust could help with this by, say, allowing your second husband to benefit from trust income during his life, with the principal reverting to your children from your first marriage upon his death.

Likewise, a trust can be structured to make disbursements only when certain milestones are reached — graduating from college, say, or reaching a certain age.  A so-called “spendthrift trust” could protect an heir from his or her own worst instincts while preserving assets for future generations.  

These are just some of the ways trusts can help you protect against unexpected family circumstances, while ensuring that your own goals for your legacy remain in place.  

Legacy Planning In a Time of Uncertainty

As the world continues to deal with the onset and aftermath of the coronavirus, it’s a very natural time for people to consider their legacies. Some have a newfound sense of their own mortality, while others are motivated by the economic fallout of the virus, or its potential effects on the political environment. For whatever reason, many people have developed an immediate sense of urgency around organizing their estates, whether it’s a matter of establishing a solid working plan or making sure existing plans reflect their present lives.

The events of 2020 also make people aware that they might need to revisit their estate plans more often than they have been. “Ordinarily, we recommend checking in on your plans once a year,” says Kevin Hannant, Market Trust Executive at Bank of America Private Bank in Los Angeles. But, he adds, circumstances may prompt you to revisit more frequently — not only events such as the coronavirus but also life milestones such as the birth of a new grandchild, or a significant change in tax laws, such as the 2017 Tax Cuts and Jobs Act. “Changes to families and changes to laws can both be pretty dramatic and can shift an entire estate plan,” says Hannant.

While the protocols around social distancing may complicate the traditional process of estate planning, remote and virtual ways of communicating with your financial advisor can make it easier. Talk to your financial advisor for more details about making or updating your trust and estate plan.

 

Case studies are intended to illustrate brokerage products and services available at Merrill and banking products and services available at Bank of America. You should not consider these as an endorsement of Merrill as an investment adviser or as a testimonial about a client's experiences with us as an investment adviser. Case Studies do not necessarily represent the experiences of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies discussed are not appropriate for every investor and should be considered given a person’s investment objectives, financial situation and particular needs. Clients should review with their Merrill Lynch Wealth Management Advisor the terms, conditions and risks involved with specific products and services.

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