trust

When Robin Williams and Joan Rivers died in 2014, they had already taken steps to look after their families by setting up trusts. That didn't happen by accident – it required careful planning, diligence, and close work with their estate lawyers and financial advisors.

Is it time to talk to your clients about setting up a trust? Use this article as a framework for that conversation. We'll go over what a trust is, what the different types are, and how to make it part of a solid estate plan.

What is a trust?

A trust is a fiduciary relationship where one party – the grantor – gives a second party, the trustee, the right to hold title to property or assets. The trustee holds these assets on behalf of a third party called the beneficiary.

These three parties are named in a trust, and each has a specific role:

• the grantor makes the initial decisions
• the trustee manages the assets
• the beneficiary eventually receives distributions

While trusts are considered an investment vehicle, they are primarily a legal entity that names these three parties and their responsibilities.

A trust contains two main components:

• principal: assets such as cash, stocks, bonds
• income: what those assets earn over time; for example, interest, dividends, royalties

Trusts serve important estate planning goals, such as reducing taxes. But here's the key benefit: trusts typically avoid probate, which saves time and money. And for your high-profile clients, avoiding probate means records are kept private.

We'll go over other benefits of trusts in a later section.

Revocable vs. irrevocable trusts

These are the two broad categories of trusts. Most clients start with revocable trusts, and some eventually use irrevocable trusts for specific tax goals.

Revocable trusts

Revocable trusts, also called living trusts revocable living trusts, are created during the grantor's lifetime. The grantor can:

• change the trust at any time
• terminate it completely
• add and remove assets freely

The grantor has full control of the trust. This means having free access to the assets in the trust. This flexibility is the main appeal. They can adjust the plan as circumstances change.

With that flexibility comes one restriction: a revocable trust is subject to estate taxes. Since the grantor controls and benefits from the assets, the IRS includes them in the taxable estate. In effect, a revocable trust is primarily a probate avoidance tool.

Irrevocable trusts

An irrevocable trust works differently; once it has been set up, it cannot be changed at all. This restriction comes with these benefits:

• federal estate taxes are reduced
• assets in the trust are shielded from creditors and lawsuits
• probate is avoided (just like revocable trusts)

A client who sets up an irrevocable trust loses control forever. They cannot access the money for personal needs later. This permanence calls for careful planning. Read our guide on irrevocable trusts for more.

Other types of trusts

There are other options to discuss with clients, depending on what type of trust suits their needs best. Here are a few of them:

• Marital trusts (also called "A" trusts) provide benefits to a surviving spouse. Assets, along with income from those assets, transfer into the trust when one spouse dies. When the surviving spouse dies, the principal passes to the couple's heirs
• Bypass trusts (also called credit shelter trusts) help married couples maximize their estate tax exemptions. A bypass trust lets both spouses use their full exemptions. The surviving spouse receives income from the trust; when that spouse dies, trust assets pass to their heirs, minus estate taxes
• Charitable remainder trusts allow the grantor or their beneficiaries to receive income for a defined period. After that period ends, whatever remains goes to specified charities
• Charitable lead trusts work differently. Charities receive income first. Then the grantor's family gets the remainder
• Special needs trusts help clients provide financial support to disabled family members. They allow beneficiaries to receive additional support without losing government benefits like Medicaid. The trustee distributes money for expenses that government
• benefits don't cover
• Spendthrift trusts control when and how beneficiaries receive distributions. Clients use these when they worry that beneficiaries will be reckless in spending inherited assets. Instead of giving cash, the trustee might pay a beneficiary's rent, medical bills, or education expenses directly
• Irrevocable life insurance trusts (ILIT) hold life insurance policies. When the grantor dies, insurance proceeds fund the trust. This keeps the proceeds out of the taxable estate while providing immediate liquidity
• Grantor retained annuity trusts (GRATs) help reduce taxes on significant gifts to family members. The grantor funds the trust and receives annuity payments for a specified period. After that period, remaining assets pass to the next generation with little or no gift tax

These are just a few of the strategies you can take when discussing estate planning with your clients.

Trust vs. will

In 2024, a survey on estate planning found that respondents knew the basic differences between trusts and wills but missed out on the small but important details. This presents an opportunity for advisors like you to educate clients on trusts and wills.

A will = a letter

A will is a legal document that directs who receives assets after death. Think of it as your client's instruction letter to the court – a will:

• names beneficiaries
• appoints an executor to settle the estate
• designates guardians for minor children

Here's a downside: a will goes through probate court. It is reviewed by a judge but can be contested by others, such as family members excluded from the will. The entire process becomes public record. Anyone can access the will and see what was owned and who inherited what.

Probate involves costs. Court fees and attorney fees reduce what beneficiaries stand to receive. The process takes time. In many states, it can take months or even years.

A trust = a legal contract

A trust, meanwhile, is a legal contract. It can operate during the grantor's lifetime. Assets held in a trust bypass probate entirely, so beneficiaries access assets much faster. The process remains completely private. Court involvement is minimal or nonexistent.

Trusts offer control that wills cannot match. The grantor can specify exactly when distributions take place. They can specify to whom distributions go. They can leave everything to a spouse or split assets between spouse and children. They can stagger distributions based on age.

Here's one big difference: Wills only work after death. Unlike irrevocable trusts, wills and revocable living trusts can be updated. They should be reviewed and revised after major life events:

• marriage
• divorce
• a death in the family
• the birth of a child or grandchild
• falling out with a family member or trustee

The best practice is to use both wills and trusts. A trust delivers efficiency, privacy, and control for key assets; a will names guardians and ensures everything else follows the same plan.

Why clients need trusts: key benefits

Trusts aren't just for the ultra-wealthy; they are recommended for anyone who:

• owns a home or other significant assets in their own name
• has savings or investment accounts they want to pass on efficiently and privately
• wants more control over how and when beneficiaries receive assets (for example, by age, milestones, or specific purposes)

If your client meets the conditions above, here are some reasons to set up a trust:

• Probate avoidance allows assets to pass to beneficiaries quickly and without court involvement. This saves time, money, and eliminates public disclosure of the client's estate
• Control over distributions lets clients specify exactly when and to whom assets pass. Clients can direct funds for specific reasons, stagger distributions by age, or condition money on certain achievements
• Asset protection shields assets from creditors of beneficiaries. Irrevocable trusts can also protect assets in divorce situations
• Support for vulnerable family members is critical for clients with disabled loved ones or beneficiaries who lack money management skills
• Tax reduction through irrevocable trusts removes assets from the taxable estate and can reduce federal estate taxes for wealthy clients

How trusts fit into an estate planning strategy

Trusts are fundamental to comprehensive financial planning. They offer control, privacy, and probate avoidance for clients. For independent advisors and RIAs, understanding how a trust works helps you guide clients through important decisions.

Your role includes understanding trusts even if you don't create them. Help clients recognize when a trust makes sense. Know when to refer to professionals. Coordinate your financial advice with their legal strategy. The best estate plans integrate financial planning, tax strategy, and legal structure seamlessly.

Trusts aren't exclusively for ultra-wealthy clients. Any client with substantial assets or specific control goals should consider one. With proper planning, a trust becomes the centerpiece of a solid estate plan.

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