📝 Is a trust on your financial to-do list? Here’s why it should be

☕Good morning! 

Welcome back to another week of Making Sense of Your Money. Today, we’re tackling the topic of trusts—and no, they're not just for monocle-wearing billionaires plotting their next yacht purchase.

For many folks, the word conjures images of monocle-wearing tycoons sipping brandy in wood-paneled studies, plotting how to keep their vast fortunes from the taxman's grasp. 

If you didn't grow up with a family accountant on speed dial, trusts might seem as relevant to your life as polo lessons or yacht maintenance.

But here's a plot twist: trusts aren't just for the Monopoly Man. 

These nifty financial instruments can be surprisingly useful for top-earners, HENRY individuals, and wealth-preservation aspiring folk all the same. 

Whether you're thinking about your family’s future or looking to creditor-proof some of your assets, trusts might just be the secret weapon you didn’t know you needed.

To Trust, or Not to Trust?

Trusts aren't a modern invention—they've been around since knights were clanking around in shining armor. 

⚔️ Born in medieval England, trusts originally helped crusaders protect their lands while off fighting holy wars. 

Fast-forward to today, and trusts have evolved from protecting castles to safeguarding everything from family businesses to your grandmother's cherished porcelain cat collection.

However, for our specific purposes, trusts are an excellent utility for high earners for several reasons. 

🧮 Trusts can be great for tax optimization, helping reduce estate, income, or even gift taxes. 

We’ll get into greater detail about how each trust impacts your tax situation differently later on. 

🪜The higher you climb the income ladder, the more likely you are to be a lawsuit target. 

This isn’t a scare tactic but just an unfortunate part of the game– rarely does anyone want to sue someone with no money because it’s pretty obvious what they’ll get if they succeed. 

However, if you look well-off enough, you become an appetizing target for the world’s more litigious folks. 

Trusts can create a barrier between your assets and potential creditors or litigants, ensuring that one professional setback doesn't wipe out a lifetime of hard work.

🥷Trusts are private. 

Unlike wills, which become public record, trusts can keep your financial affairs as private as your secret cookie stash. 

What happens in the trust, stays in the trust.

👻 Trusts give one control from the grave. 

Morbid? Perhaps. 

Effective? Absolutely. 

Trusts allow you to dictate how and when your assets are distributed long after you've shuffled off this mortal coil.

👶Trusts are a staple for estate planning and business succession. 

Strategic estate planning helps you structure your legacy in ways that can benefit multiple generations, potentially reducing estate taxes and ensuring your wealth makes its way to the intended recipients rather than funneled to the government. 

If you're a business owner, trusts can be invaluable in creating a smooth succession plan. They can help you transfer ownership gradually, maintain control during your lifetime, and potentially reduce the tax burden on your heirs.

🏛️ Trusts can help your assets sidestep the court probate process, saving your heirs time, money, and unnecessary stress. It's like a fast-pass for your estate.

❓Why trusts are often misunderstood

There are three key misconceptions we run into:

"Trusts are only for the super-rich." 

This is one of the biggest myths. Trusts can be useful for anyone who wants to avoid probate, manage assets efficiently, or provide for loved ones.

The probate process is basically a legal speed bump after someone passes away. It’s when the court steps in to make sure your will is legit, your debts are paid, and whatever’s left gets handed out. It can drag on for months, rack up hefty fees, and put your private affairs on public display.

Setting up a trust lets you skip all that. Your heirs get their inheritance faster—no courts, no waiting—and it all stays under the radar, nice and private.

"A will is enough." 

A will outlines your wishes, but it doesn’t avoid probate. A trust, on the other hand, ensures a smoother, faster transition of assets.

"Trusts are too complicated." 

While setting up a trust requires some legal and financial planning expertise, the long-term benefits often outweigh the upfront complexity. Plus, with a good estate planner, it’s not as overwhelming as it seems.

The Wide Variety of Trusts

Trusts can be set up as either revocable or irrevocable. 

A revocable trust gives you control over your assets during your lifetime and helps you avoid probate when you pass. 

It’s a useful tool for organizing your assets but won’t shield you from income taxes.

An irrevocable trust offers stronger protection from creditors and lawsuits while removing assets from your taxable estate, reducing future estate taxes. 

However, you lose control of the assets once they’re in the trust.

For the most part (testamentary trusts are the exception), trusts bypass the costly and time-consuming probate process, ensuring your assets are passed to your heirs quickly, privately, and according to your wishes.

Trusts don’t completely avoid taxes. 

While the step-up in basis helps heirs avoid capital gains taxes, any rental income earned from property held in a trust will still be taxed. 

Additionally, trust tax rates are much higher than personal tax brackets, making income distribution to beneficiaries a common strategy. 

The 2024 trust tax rates are as follows:

• $0 – $2,900: 10%

• $2,901 – $10,550: 24%

• $10,551 – $14,450: 35%

• $14,451+: 37%

Certain trusts can help you navigate the tax landscape more efficiently, potentially saving significant sums over time.

For example, an irrevocable life insurance trust (ILIT) can remove life insurance proceeds from your taxable estate, while a grantor-retained annuity trust (GRAT) can transfer appreciation on assets to your beneficiaries with minimal gift tax consequences.

Making Sense of Trusts

Trusts might take some effort to learn, but the payoff can be substantial, especially for high earners. 

As we’ve learned, trusts come in different shapes and sizes, but the two main types are revocable and irrevocable. 

A revocable trust is all about control—you can change it, add to it, or even dissolve it entirely. While it doesn’t save you on taxes during your lifetime, it helps simplify your finances and ensures your assets avoid the probate process when you pass. 

Think of it as a way to keep everything organized, making sure your investments, properties, and accounts transfer seamlessly to your heirs without court involvement or delays.

Irrevocable trusts are less flexible. Once you’ve put assets in, you can’t touch them. However, the trade-off is strong protection from creditors and potentially big savings on estate taxes.

 For someone expecting their estate to grow beyond the federal estate tax exemption limit ($13.61 million), this could mean saving your heirs millions in taxes. 

It’s also the trust of choice if protecting your wealth from legal risks or lawsuits is a concern.

So, how do you know if a trust is right for you? 

If you’re on the fast track to accumulating a significant amount of wealth– whether that’s in properties, investments, or stock options—and you want to avoid probate, protect your assets, or manage how your children or beneficiaries receive their inheritance, trust is worth serious consideration. 

For professionals who earn a high income, have complex assets, or want to set aside money for education or future family needs, a trust can be a lifeline that keeps everything organized, even if life throws some unexpected surprises your way.

That said, trusts can be complicated. You don’t want to jump into setting one up without expert guidance. 

An estate attorney will ensure the legal structure is sound, a financial planner will make sure it fits into your broader wealth strategy, and a tax advisor will help navigate the nuances of trust taxation.

Until next week!

Dan Pascone

P.S. Follow me on LinkedIn for more tax gems to save you money.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Security and Advisory Services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.