Wealthy families across the United States are using trusts to protect and grow their wealth… and pay less taxes. Here’s how you can do the same.
High-net-worth investors often utilize sophisticated financial strategies to both grow and protect their wealth. One common instrument they use is a trust.
Trusts can serve various purposes, including reducing estate taxes, protecting assets from creditors, and ensuring that assets are managed and distributed according to the grantor's wishes.
While trusts are not typically the primary vehicles for growing wealth (compared to, say, investments in stocks, real estate, or businesses), they can play a part in wealth preservation, which can indirectly support wealth growth. Here's how:
According to a recent UBS Investor Watch Survey, 83% of investors express concerns about the smooth transfer of their assets. To address this concern, having written documents such as wills and living trusts can help you secure the management of your wealth. These documents enable a seamless transfer of assets, protect accumulated wealth, and establish a strong foundation for future generations.
As we touched upon above, trusts can provide tax efficiency. Investors can reduce their tax liabilities depending on the type of trust used and the jurisdiction it’s been established in. When a trust distributes income to its beneficiaries, the IRS permits the trust to claim a tax deduction. The beneficiary pays the income tax on the amount they receive, not the trust itself.
The money given to beneficiaries first comes from the income generated in the current year and then from the trust's principal (the initial amount of money placed in the trust). Distributions from the principal are not subject to taxation. Any capital gains on the principal may be taxable for the trust or the beneficiary. The amount distributed to the beneficiary is taxable for them, but only up to the deduction claimed by the trust.
To report income earned from the date of the person who established the trust's death, you use Form 1041. Distributions made to trust beneficiaries are reported using Schedule K-1. In 2022 and 2023, the highest tax rate for trusts due to deaths is 37%. To fully harness the tax benefits of trusts, working with a wealth preservation specialist can help you create a tailored strategy that aligns with your financial situation and goals.
The two basic trust structures are revocable and irrevocable. However, the world of trusts is not one-size-fits-all.
"Trusts can address tax and creditor issues, support your family, or donate to a cause you care about. There's a trust to match everyone's needs." - Nic J. McLeod, Owner & Operator of NJM Wealth Preservation Strategies.
The type of trust you choose should reflect your unique wishes for how your assets are handled now and in the future:
Nic concludes, “When you know what you want out of your trust and how you want it to affect future generations, you can work with your Fiduciary advisor to narrow down which trust makes the most sense for you.”
A revocable trust can be changed at any time by the grantor during their lifetime, as long as they are competent. An irrevocable trust usually can't be changed without a court order or the approval of all the trust's beneficiaries.
Our chart below compares the key features and differences of revocable and irrevocable trusts:
Remember, the specific features and benefits of each trust type may vary based on jurisdiction and the specific terms set by the grantor. Consulting with your trusted Fiduciary advisor is crucial when establishing or amending a trust.
When setting up a trust, selecting the right trustee is crucial. A trustee is responsible for managing the assets held within the trust and distributing them according to the trust's terms and the grantor's wishes. A trustee should be impartial and act solely in the best interests of the beneficiaries. This neutrality helps maintain the integrity of a trust.
Establishing clear guidelines within the trust document is essential to provide the trustee with a roadmap for asset management and distribution. These guidelines should align with your wealth preservation and distribution strategy. Open communication with your trustee is crucial; they fully understand your wishes and preferences.
A reputable wealth preservation firm can assist you in navigating the complexities of setting up a trust. At NJM Wealth Preservation Strategies, our wealth preservation managers can help you analyze your unique circumstances and guide you in structuring your trust so you can achieve your personal and financial goals.
Incorporating trusts into a wealth management strategy often requires the guidance of financial advisors, attorneys, and other professionals who are highly experienced in estate planning and asset protection. Trust laws can vary significantly between jurisdictions, so it's crucial to work with experts familiar with the specific rules and opportunities in your relevant state and region.
At NJM Wealth Preservation Strategies, we offer investors valuable knowledge and can help optimize your financial strategies when it comes to trusts and estate planning. Whether you want to protect your assets, minimize tax liabilities, or ensure a smooth wealth transition to future generations, partnering with a trusted wealth preservation firm can provide numerous benefits. At NJM, we can help you with the following:
By delegating your trust and estate planning needs to a reputable wealth management firm like NJM Wealth Preservation Strategies, you can know that your financial affairs are in capable hands.
Trusts are valuable tools that offer wealth preservation and tax efficiency benefits while protecting your wealth and assets.
As your dedicated advisors, NJM Wealth Preservation Strategies provide you with ongoing support, helping to ensure your trusts and overall financial plan align with your objectives. Let us help you leverage the power of trusts to secure your financial future for generations to come.
Contact us today to learn how we can help you preserve and grow your wealth for a secure and enjoyable retirement.