As an estate planning lawyer, you know that wills and beneficiary designations help your clients establish control over their assets upon death.
You also know that sometimes these alone are not enough to address all concerns and goals – which is where trust structures come in.
But did you know that more people can benefit from trusts than you may think? And that certain factors, if overlooked, can unravel your client’s intended goals for the trust?
Together with Jonathon Naef, co-founder of Balance Family Law and College of Law LLM (Applied Law) majoring in Estate Planning alumnus, we explore the misconceptions, mistakes and crucial points to note when it comes to trusts in estate planning.
The importance of understanding trusts
In estate planning, your role is to ensure that your client’s goals can be achieved once they’ve passed away. You do that by setting up the right structures, in the right way, according to your client’s intentions.
Trusts are often one of the structures used for this purpose. And the two types of trusts you’ll work with are:
- Testamentary trusts, which are set up in the will and only established once the person dies.
- Inter vivos trusts, which are created while the person is still alive.
As an estate planning lawyer, you’ll help your clients set these trusts up, or you’ll work to improve their existing trusts.
Therefore, it’s paramount that you understand trusts inside out, as chances are – your clients won’t.
2022 Lawyers Weekly 30 Under 30 Wills and Estates winner, Jonathon Naef, shares his insights, “A lot of clients come to us without really knowing what trusts actually do. So as a good lawyer, you need to have a comprehensive understanding of all the trust structures. Then you’ll know what would work best in your client’s situation and how to advise them accordingly.”
Working with existing trust structures
It is likely that you’ll come across clients who already have trusts set up.
But that doesn’t mean you can relax. In fact, that’s where your real work starts.
“In such situations, the first thing you need to do is study the trust deeds to get an accurate idea of the trust’s financial state,” Jonathon advises, “as well as the people currently holding the control positions.”
Control positions are people who have been appointed to manage the trust – trustees and appointors/guardians. Your role as the estate planning lawyer is to ensure that the right people are in the control positions – and that there’s a succession plan.
This is extremely important because a trust can exist for decades, but the people in the control positions may not, due to various reasons. For the trust to meet your client’s goals as long as it exists, the right people need to be in control at all times.
When looking at the succession plan, you may find that either:
- A plan is in place and your client is happy to maintain the status quo
- A plan is in place, but your client wants to change it
- There is no succession plan at all – which means you need to help your client create one
When to consider setting up trusts
If your client doesn’t have any existing trust structures, you’ll need to work with them to decide if setting one up will be beneficial.
Your client may want to consider establishing trusts if they’re looking for:
- Tax benefits: Trusts are useful when it comes to efficient income streaming and family tax planning. But testamentary trusts, in particular, offer one stand-out benefit: they allow children (under 18) to receive the same tax-free threshold as adults.
- Asset protection: With trusts, beneficiaries do not own the inherited assets. This means the assets will be protected from third-party claims (such as bankruptcy or family law proceedings). Trusts can also protect beneficiaries from themselves or other people, especially if the beneficiaries have specific vulnerabilities such as illnesses or disabilities.
- Multigenerational benefits: A trust that is set up now can last for up to 80 years. This allows your client’s assets and the income from those assets to continue to benefit even their grandchildren and great-grandchildren.
On a side note, many people incorrectly assume that setting up a trust as part of your estate plan, specifically testamentary trusts, is only useful for those who will be leaving substantial estates. In other words: individuals who own millions of dollars or large property pools.
But Jonathon begs to differ.
“Testamentary trusts can actually be very useful for a lot of people, not just those who are leaving a vast amount of wealth,” he says.
“In fact, as long as your client is leaving assets that could generate income, or they have beneficiaries that require protection, they should consider setting up a testamentary trust in their will. The asset threshold doesn’t have to be high for the trust to be beneficial.”
Pay attention to the control positions
No matter what type of trust you’re helping your client with – whether existing or new, testamentary or inter vivos – remember not to overlook the control positions.
Jonathon stresses, “These control positions are one of the important factors that will determine how effective the trust structure will be in meeting your client’s goals. And it’s crucial that you check and work with your client to appoint the most appropriate people.”
Because if you’re not careful, the wrong person stepping into a control position can unravel your client’s overall intentions for the trust structure.
For example: A testamentary trust that is set up with the beneficiary also appointed as the trustee, may, in some circumstances, impact the trust’s asset protection element. Because this means the beneficiary has the power to make decisions about the trust. And so, in the event of a bankruptcy or family law proceedings, the courts may decide to treat the trust assets as personal assets – and use them to pay off claims.
So, to ensure that the trusts are set up to meet your client’s goals, you need to know:
- What risks and concerns your client has about their assets and beneficiaries
- How you can mitigate those risks
- The best people for the control positions
- The backup or succession plan for when these people can no longer manage the trust assets and benefits
Jonathon completed his PLT with the College, was the best graduating student in the Estate Planning major of the Master of Laws (Applied Law), and most recently he received the Lawyers Weekly 30 Under 30 Award in Wills and Estates.
Up your game in the world of trusts and estate planning
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