Don't make these crucial wealth-preservation errors
By Jennifer Proper - Managing Director, Wealth Strategies
July 26, 2022 - Trusts can be intimidating. Few of us grow up learning what they are, and unless we study law or finance, they often remain a mystery. It’s not surprising, then, that so many families make mistakes with trusts. However, with the right education and guidance, you can avoid these common errors, protect your assets, and preserve your wealth.
Mistake 1: Not Learning How a Trust Could Benefit You
Unless you grew up wealthy and your parents or grandparents held assets in a trust, you may have no idea how trusts work or how they might benefit you.
One of the biggest benefits of a trust is preserving wealth for your heirs. Let’s say you fund an irrevocable trust with $5 million and that balance has grown to $10 million when you pass away. Keeping that $5 million gain out of your taxable estate could preserve $2 million for your family that would otherwise go to the government.
Have a professional run the numbers and show you some potential scenarios. If you do nothing, estate law stays the same, and your estate grows to a certain sum, what you will owe in estate taxes? How much could you save by establishing a trust in advance of that potential appreciation?
Learning about trusts is essential if you’re the first member of your family to become wealthy. It’s also important if you’ve recently sold a business or received an inheritance and reached a new level of wealth.
Mistake 2: Not Funding Your Trust
Drawing up trust documents is an important first step, but your trust will not accomplish what you want it to unless you fund it, or place your assets into it. The funding process depends on the type of trust and the type of asset but typically requires completing the right paperwork.
The law does not require a trust to be funded within a certain time frame once established, which allows people to procrastinate indefinitely. However, creating a trust without funding it is like buying a house and never moving in — letting it sit empty while you camp in a tent in the backyard and your possessions languish in a storage pod. You’ve taken an important step, but you’re not actually getting the protection and security you’ve pursued and paid for.
Mistake 3: Funding a Trust in Reaction to Political Speculation
Tax rates are a never-ending political battle. When the momentum seems to shift toward a possible increase in tax rates or decrease in the estate tax exemption, some people make impulsive decisions in an attempt to preserve their assets. Their fear can result in overplanning and putting too much of their net worth into a trust, then having to borrow from the trust to fund their lifestyle. The reason why this is problematic is because it could result in having to reverse some of the estate planning work previously done, and could result in a waste of a client’s federal exemption as they are taking money out of a federally tax exempt trust and putting it into an account in their name that is part of their taxable estate.
Lawmakers have proposed certain tax changes for decades without ever making them, and often, a proposed law doesn’t pass, or a favorable provision that’s set to expire gets extended. There’s typically enough time leading up to a law’s passage, or between a law’s passage and its implementation, to engage in wealth planning that’s thoughtful and strategic without being reactionary.
Mistake 4: Not Choosing Your Trustee Carefully
The most important section of any trust is the trustee section. It determines who is in charge of the trust’s assets: in other words, whether those assets get used wisely and as you intended, frittered away, or even embezzled.
Many people appoint a trustworthy and financially savvy family member, business partner, or friend, but those aren’t your only options. You can also choose a corporate trustee, an attorney, or a financial advisor. Pitcairn is a full trust company and acts as trustee for many of our clients.
Mistake 5: Not Reviewing Your Trust Documents Regularly
Creating a trust, like creating a will, is usually not a one-and-done event. Life events should always trigger a review of your trustee, beneficiaries, and other key details.
Examples of life events include the birth of a child, your own marriage or divorce, a child’s marriage or divorce, the aging or mental incapacity of someone in the family, the death of someone in the family, the sale of a business, or a dramatic move from one level of wealth to another.
Mistake 6: Not Communicating Your Plans with Your Family
Adult children and other family members who may stand to inherit from your estate are likely to feel anxious if they don’t know your wealth-transfer plans. These individuals naturally want to know how much they might inherit and may be concerned about the equitable distribution of your estate. Uncertainty can cause bickering and infighting during your lifetime. Surprise revelations after death can tear families apart.
Though conversations about death and money are never easy, having a frank discussion with your family about your plans can forestall serious problems. Some people understandably don’t want to share the details of their wealth, especially with children who may lack discretion. But adult children may benefit from knowing what they stand to inherit, especially if it’s less than they might be expecting.
We encounter trust mistakes like these all the time when we’re getting to know a new client and learning how they’ve managed their estate so far. The good news is that it’s often not too late to course correct. Let’s have a conversation about your goals and how a properly crafted and funded trust could serve them.