I’m a High-Net-Worth Individual. Which Trust Is Right For Me?

If you have a high net worth, one of the most powerful tools available to you is a trust. They can help you pass your wealth to your heirs and may be able to shield your money from creditors. However, there are many types of trusts available. Selecting the right trust(s) will help ensure your money goes to the people you want rather than being drained from your accounts.

If you still aren’t sure which kind of trust you need, a financial advisor can help.

Revocable Trust

Revocable trusts, or revocable living trusts, put you in control of your assets while you are still living. That allows you to make several changes, including managing funds, adding and removing beneficiaries and even dissolving the trust if necessary. Revocable trusts have further flexibility, too; for instance, you can name yourself the trustee and select a successor trustee. The latter will manage the trust when you are no longer able to do so.

Revocable trusts have another benefit, which is that they aren’t subject to probate court. This means your beneficiaries won’t have to go through the probate process when your assets are distributed. Plus, wills become public record after probate, while trusts do not become public record. That allows for greater privacy if you don’t want your assets disclosed to the public.

Irrevocable Trust

An irrevocable trust is one that, unlike a revocable trust, cannot be changed or dissolved once it is established. If for some reason you have assets you want to protect, you could establish an irrevocable trust. However, revocable trusts become irrevocable when the trustee dies. Thus, if you establish a revocable living trust, it will eventually become irrevocable. Be sure you appoint a successor who can be responsible for the trust at that point.

Irrevocable Life Insurance Trust

Life insurance can be used with an irrevocable trust in what is known as an irrevocable life insurance trust (ILIT). With this strategy, you establish a trust and make it the beneficiary of the life insurance policy. By using an ILIT, a grantor can exclude a life insurance payout from the gross estate. An ILIT would also shield a life insurance payout and your beneficiaries from any legal action against you. Legally, ILITs are not owned by the beneficiaries, which makes them tough for the courts to label as assets. It also makes it almost impossible for creditors to take those funds.

Finally, an ILIT can prevent a life insurance payout from going directly into the hands of a minor. The ILIT can direct those funds to a spouse or to a trustee. That person can be directed to hold onto those funds until a minor reaches adulthood or meets benchmarks you’ve specified.

Charitable Lead Trust

A charitable lead trust is a way to give gifts of cash or other assets to a charity for a certain period of time. You may also be entitled to tax deductions when you donate to the trust.

Structured as an irrevocable trust, you can have the trust pay your favorite charity for five years, for example. When that period ends, the rest of the assets will be paid to your non-charitable beneficiaries, who pay lower taxes as a result of the trust.

Charitable Remainder Trust

Charitable remainder trusts are also irrevocable trusts that come with several benefits. When you make a contribution to the trust, you or someone you name can receive a partial tax deduction. In addition, you and a beneficiary can receive an income stream from the trust for up to 20 years. Then, after a specified time period or after the last beneficiary passes away, the remainder is distributed to one or more charitable beneficiaries.

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Generation-Skipping Trust

Generation-skipping trusts allow you to skip a generation when passing down assets – this usually means passing them directly to your grandchildren instead of your children. To qualify, the beneficiary must be at least 37 ½ years younger than you.

The benefit of this approach is that it can avoid the estate tax that would otherwise apply if your children had inherited the assets. They are particularly beneficial for very high-net-worth individuals because they take advantage of the estate tax exemption of $12.06 million for 2022. In other words, beneficiaries can potentially receive as much as $12.06 million without being subject to taxation.

The Bottom Line

Trusts provide ample opportunity for you to pass your assets on to the beneficiaries of your choosing, whether that be your children, grandchildren, or a charity. Of course, you can also name others as beneficiaries if you prefer. In general, the biggest benefit of trusts is they can greatly reduce the taxes owed by your estate – potentially millions of dollars in some cases. But trusts can offer other benefits, too, such as a tax deduction for you and income streams for you and your beneficiaries. If trusts are set up properly, they can go a long way in helping you preserve your wealth.

Tips for Estate Planning

Estate and trust planning can be complicated. Rather than trying to set everything up yourself, it is best to work with a financial planner to help you set up your trust. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You may also want to hire an estate planning attorney, particularly if you have a high net worth. The more assets you have, the more is at stake – and the more important it is to have the right legal protections in place to safeguard your assets.
To reiterate, DIY estate planning is rarely your best course of action. Although it can be tempting in order to save some money, it will pay off in the long run to have professional help.