2015-08-13 | FinancialPlanning.com

Should Estate Plans Rely on Trusts?


To some estate planning attorneys, trusts are the default option. Their wealthy clients generally pass assets to heirs that way. Trusts can keep inherited wealth safe; assets that are left outright to individuals may be vulnerable to estate tax and divorce and creditors and scam artists.

That said, trusts might not always the best choice for wealth transfer. "I agree with the use of trusts, when appropriate, for significant asset inheritances," says Gil Armour, a financial advisor with SagePoint Financial in San Diego. "However, I have always been a fan of simplicity. An outright inheritance to an individual is much quicker, simpler, and doesn't require ongoing trust tax returns. Virtually every one of my clients has specified individuals as the primary beneficiary for their retirement accounts. They are confident that their spouse or adult child will manage the assets in a responsible fashion."

Armour adds that a number of his clients use a living trust as a contingent beneficiary, primarily when there are minor children. "The trust can then handle the assignment of a guardian for the children until they are old enough," he says. "I can recall only one client who had a financially irresponsible child. This client created a trust that doles out the money on a gradual basis, throughout the child's life."


Conversely, Ben Hockema, a financial advisor in the Park Ridge, Ill., office of Deerfield Financial Advisors, says that most of his firm's clients leave assets to trusts. He goes on to list several reasons to consider using a trust as an estate planning tool, rather than relying solely on a will.

Assets held in trust avoid probate at death, Hockema points out. "That's especially important in situations with property in multiple states," he says. If someone dies holding property in various states, probate in each state might be required.

"Using a trust provides control for assets in case of incapacity," Hockema continues, as a co-trustee or successor trustee will take over management of trust assets. "A trust also offers maximum privacy, as a will is public record. Depending on its language, using a trust could reduce or eliminate estate taxes, and provide protection from divorce settlements and creditors. Finally, a trust can protect dependents with special needs."

Hockema says his clients use trusts in one of two ways. Some title assets to a trust while alive, so the language of the living trust will determine the distribution of trust assets at the grantor’s death. "Others do not have a standalone living trust," he says, "so a testamentary trust is funded through a will."

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

This story is part of a 30-day series on estate planning strategies.